Tax Guru – Ker$tetter Letter

Q:

I read on your website that equipment acquired through $1.00 purchase option capital leases qualify for Section 179 treatment exactly the same as a cash purchase.  Would the tax treatment be any different if the lease had a mandatory 25% purchase requirement?  The purchase requirement is considered a put (balloon).  The Lessee must purchase the equipment at lease maturity and cannot return the equipment.

A:

It depends on how the buyer/lessee records the acquisition on his books.  If he sets it up as a purchase with the present value of the loan as the offsetting credit, and posts subsequent payments to principal and interest instead of lease expense, he would have a good case to claim the Section 179 in the first year.  The value to be used would not be the sum total of the lease payments because the obligation to the lessor would have to be discounted for the interest rate that is built into the monthly payments.

If, as many lessees want to do, he doesn’t show the debt on his balance sheet, and wants to expense the monthly lease payments, no Section 179 or depreciation would be appropriate.

IRS actually addresses this issue on its website:
http://www.irs.gov/businesses/small/article/0,,id=135485,00.html

Kerry Kerstetter