capital lease?

[natiro]

Client is leasing point of sale system for 20,000. The end of lease terms say client can purchase the equipment for 20% of the FMV (at the end of 5 years), or renew the lease.

For tax purposes, is this a capital lease or an operating lease. (I would know the answer if this were GAAP!)

Thanks!

[Gretel]

20% doesn't really sound like a nominal buy out. What also needs to be considered is who is paying insurance, property taxes and who will have the loss in case of damage.

[Snaggletooth]

Not Capital

Natiro, I don't think this is a capital lease -- not even for GAAP or tax either.

Point of Sale is (I think) some kind of Sales Software with an Accounting interface.
This is in a rapidly changing business with rapid obsolescence. I don't think $20,000
can be considered a "bargain" and you would have to apply the test five years in retro.

A long time ago, I learned that if your discounted result over the period (discounting the full-up selling price at the time) resulted in a discounted rate of less than 2/3 of a Treasury bill, it would be a capital lease. That's been a long time ago and I don't know whether that rule of thumb still prevails or not.

I agree with Gabriele - $20,000 sounds a lot more than "nominal" to me...

Regards, Ron J.