Rent to Own

[Academy Tax]

A client (S Corp) entered into a contract to purchase a diesel powered track vehicle. A downpayment of $3000 was made and quarterly payments of $1000 followed. The outright price of the equipment item is approximately $15000. The Tax Book specifies that rent-to-own equipment is depreciated over 3 years, but does not define the basis for depreciation. Would the basis be the outright price? Ron

[Roland Slugg]

The 3-year depreciation period for RTO equipment is for property owned by a RTO dealer. (Code §168(e)(3)(A)(iii))

If your S Corp client is actually buying the equipment, it should be recorded on the corp's books as a purchase and depreciated over the MACRS (or ADS) class life for that equipment. Its basis is the amount that would have been paid if purchased for cash, the the excess of actual payments over that amount is interest. Someone should prepare a loan amortization schedule so the principal and interest portions of each quarterly payment can be recorded correctly.

[Academy Tax]

Great response. Thanks a bunch!

Ron