Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Section 179 & Leases

Posted by taxguru on June 30, 2004

For some reason, the topic on which I receive the most inquiries is the Section 179 expensing election, especially in regard to vehicles weighing more than 6,000 pounds, which are most often trucks, vans and large SUVs. Most of the time, I just refer the writer to my discussion of this topic on my main website.

However, when a new angle or aspect which I haven’t previously covered comes up, I do my best to share that info here.

Yesterday, I received an email asking if the writer had to purchase a truck in order to claim the Section 179 or could he lease it? I wrote back that he does have to buy it; but that how he pays for it (cash or loan) is irrelevant.

He later wrote back: “So, if I intend on purchasing the vehicle at least term for the residual value as stated in the contract, whether or not my contract is called a lease, I have a conditional sale. And that would qualify?”

I informed him that he was wrong with that reasoning. The Section 179 deduction is only allowed in the first year the asset is purchased and placed into service. Possibly buying it several years from now is not even close to being eligible.

I could understand someone possibly wanting to claim the deduction in the year of the buy-out, but at the beginning of the lease is ridiculous. A possible purchase at the end of the lease is not certain enough of an event to warrant even taking seriously, regardless of the lessee’s intention now. Who knows what will really happen at the end of the lease?

While this question addressed a normal operating lease, where the ultimate purchase price is a relatively large amount (normally thousands of dollars), my answer would have been different if it had been a capital lease. Capital leases are what we accountants call “disguised purchases” because they are often used to keep liabilities off of a company’s balance sheet (Enron, et al). At the end of the lease, the asset typically becomes the property of the lessee, often for a nominal amount (such as a one dollar buy-out). With that type of lease, which is actually a purchase in economic reality, the Section 179 deduction could be claimed in the first year just like with a normal purchase.

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