Lease w/Option to Buy

[pmedders]

Have a client that started a limo service and has leased a limo. The lease shows initial payment of $10,537.50 and $1,532.61 for 48 months. After 48 months, client has option to buy for $8430.00. But contract states lessee shall not be treated as owner of vehicle for federal income tax purposes. But looks like at end of lease client will own limo as there is also a clause that states "if no offer of sale by anyone is received or if no offer to purchase vehcile is accepted by lessor or if the vehicle is not sold for any reason, then the actual residual value shall be deemed to be zero and the lessee shall be deemed the purchaser and shall pay the estimated residual value of $8430 to lessor.

I am still unclear because of the conflicting clauses if this is a true lease or should be treated as a purchase. I think it is a purchase, but just wanted to get a few opinions.

Thanks!

Peg

[pmedders]

Any help would

be appreciated!! Just wanted to ask again for some input to my question.

Thanks!

Peg

[BOB W]

Limo

Without researching, I recall IRS using greater than 10% residual value as the trigger for it to be a lease. 10% or less was a purchase/finance to be depreciated. This could of changed from my last update. Since you didn't state the purchase price( without interest) I would guess the residual value is greater than 10%. Also the contract states it cannot not be considered a purchase by the leasee. The leasor is saying he/she is the owner and will be using any tax attributes, like sect 179 or any other tax benefits and the leasee should not.

The rest of the contract, about payoffs, is an issue not to be addressed in determining ownership for depreciation purposes because of the stated leasor's sentence about their ownership. This is a lease. Each payment is a lease deduction.

[pmedders]

Lease w/Option to Buy

The purchase price of limo was $81,000.00. So even though he is obligated to purchase vehicle at end of lease unless someone else makes offer to purchase; it would still be considered a lease being he is not considered "owner". Just want to make sure I am handling correctly. Thanks!!!

Peg

[BOB W]

Contract wording.......

..... specifically does not allow your client to consider this lease a purchase, irrigardless of lease out come.

If for some reason your client does not sell the limo at the end of the lease, he must pay the residual value of $8,430.

[pmedders]

Thanks Bob!!

Appreciate your input.

Peg

[Snaggletooth]

Bad Language

Peg, I don't think anyone could put language in a lease which determines taxability.

That's like an employee going to work at Microsoft under an employee agreement which states that employee will not be taxed on his compensation.

In absence of regulations, GAAP prevails in normal practice. If there is a nominal, or extreme bargain payout, this is considered a purchase, and the driver is considered an owner. If the $8430 is a "bargain" price, this is a purchase, and the wording of the lease cannot change application of tax law just because the parties want to treat it as something else.

After 4 years, the opportunity to buy an $81,000 limo for $8,430 is probably too great a bargain to pass up. I say this client has just "bought" himself a vehicle, and should depreciate the discounted cash value of the lease + buyout.

Peg, the problem is I don't know where to draw the line. I think a $20,000 buyout is one of considerable ponderance, and we have a lease. But where is the line drawn? I don't really know. Maybe one of the CPAs can answer this for us. They have this info at their fingertips because they have to deal with GAAP as well as taxes.
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Good luck. Maybe we'll get more posts. Bob W is a good one, and in a less definite way is saying the same thing I am.

[veritas]

Kinda of like a divorce decree that says the non-custodial parent gets to claim the children.

I would look at your clients intent. If at the end of the lease the intent is to pay the residual then go with a purchase.

[outwest]

Abitrary 10% threshold..

has been the bright line for a buyout to be a lease rather than a purchase. So you note that the $8430 is over the 10% threshold, hence a lease.

Now, an editorial comment. I noticed last week, the AICPA is looking again at this standard right now. Maybe a little to low an abitary standard.

Doug

[BOB W]

Limos'

Limos depreciate very quickly because limo services NEED reasonably new models to keep current with the competition. Some of the lucky companies get to use their limos alot and really pack on the mileage. Style and newness is very important to a limo company and used limos' carry a very low value.