What makes a lease a lease? – April 19, 2019

What can get truly ugly, my fellow taxpayers? A tax surprise!

Arthur E. Boyce claimed a $28,749 Section 179 deduction for the cost of his new truck.

In walked the IRS, and it denied the Section 179 deduction because Boyce leased the truck that he thought he purchased. The court ruled for the IRS.

Good-bye, $28,749 tax deduction. SURPRISE!!

Pertinent Facts

The contract between Boyce and Dan Wiebold Ford Inc. was titled “Motor Vehicle Lease Agreement—Closed-End” and called for Boyce to

  • Make fixed monthly payments of $607.06 over 48 months, for a total of $29,091;
  • Pay an 18-cents-per-mile excess mileage fee for miles in excess of 11,294 miles per year;
  • Pay all operating expenses, such as gas and oil, repairs, insurance, and taxes; and
  • At the end of 48 months, either pay a termination fee of $395 or exercise an option to buy the truck for $17,612.

Factors Making This a Lease

The court noted that the attributes of a lease and a sale are often the same or similar, sometimes blurring the distinction between them.

In this case, the factors that persuaded the court that this was a lease were as follows:

  • The term of the contract was less than the useful life of the truck.
  • The contract was not an open-end lease requiring Boyce to compensate Dan Wiebold Ford Inc. for any unanticipated depreciation at the end of the contract.
  • The truck was not titled in Boyce’s name. To obtain title, Boyce had to exercise his purchase option at the end of the lease.
  • The terms included an 11,294-mile trigger for 18-cents-a-mile excess mileage.
  • Dan Wiebold Ford Inc. bore the risk and rewards of any change in the resale value of the truck.

Purchase Factors

Had Boyce acquired title or equity, he would have qualified for the Section 179 deduction because he would have owned the truck.

Note. To claim 100 percent bonus depreciation, you likewise have to own the qualifying vehicle.

  • Using what the IRS says in Rev. Rul. 55-540, Boyce would have qualified as the owner of the truck if any one of the following was true:
  • His lease payments were building equity.
  • He would have received title to the truck after he made the payments.
  • His payments would have been over a short period and approximated what he would have paid to buy the truck.
  • He had the option to purchase the truck for a nominal price at the end of the lease.

As you can see, there are times when it is difficult to classify a contract as either a lease or a purchase.

If you are thinking of leasing or buying with something other than a straight purchase and would like my help, please give me a call @772-337-1040

So until next time

CYA

Jeffrey “When is a Lease, Not a Lease” Schneider