Many businesses choose to lease their equipment. The following four criteria can determine if it is a capital lease:
- Ownership: The ownership of the asset is shifted from the lessor to the lessee by the end of the lease period; or
- Bargain purchase option: The lessee can buy the asset from the lessor at the end of the lease term for a below-market price; or
- Lease term: The period of the lease encompasses at least 75% of the useful life of the asset (and the lease is noncancellable during that time); or
- Present value: The present value of the minimum lease payments required under the lease is at least 90% of the fair value of the asset at the inception of the lease.
If a lease agreement contains any one of the preceding four criteria, the lessee will record it as a capital lease. The lessee capitalizes the asset and would then have depreciation expense as well as other possible deductions, including a 179 deduction and applicable interest deduction. If the lease is truly an operating lease, the only expense would be the monthly lease payment.
View other recent Tax Talk articles:
IRS Requiring Bank Account Verification Annually
Potential Refund Delays
Tax Relief for Hurricane Matthew Victims
De Minimis Benefits
New IRS Compliance Campaigns
New Form 8938 to Include Specific Domestic Entities
Guarantee of S Corp Loan didn’t Create Basis to Claim Loss