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Income & Expenses

Question: If you lease-purchase a piece of equipment for use in a trade or business, like a forklift or truck, do you deduct the lease payments or do you depreciate the cost of the equipment?

Answer:

You must first determine whether your agreement is a lease or a conditional sales contract. If the agreement is a lease, you may deduct the payments as rent. If the agreement is a conditional sales contract, you consider yourself as the outright purchaser of the equipment. You may generally recover the cost of such property used in a trade or business through depreciation deductions.

Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, which is read in light of the facts and circumstances when it was entered into. Determine the parties' intent based on the facts and circumstances that exist when you enter into the agreement.

In general, you may consider an agreement as a conditional sales contract rather than a lease if one or more of the following conditions apply:

  • The agreement designates part of each payment towards an equity interest that you will receive in the property.
  • You get title to the property upon the payment of a stated amount of rental payments required under the agreement.
  • The amount you pay to use the property for a short time is a large part of the amount you would pay to get title to the property.
  • You pay much more than the current fair rental value for the property.
  • You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.
  • You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement.
  • The agreement designates some part of the payments as interest, or parts of the payments are easy to recognize as interest.

Additional Information:


Category: Small Business, Self-Employed, Other Business
Subcategory: Income & Expenses

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
SE:W:CAR:MP:T:T:SP
1111 Constitution Avenue NW
Washington, DC 20224