What’s the cost basis for an auto lease under this treatment?
Why do people want to pay taxes so badly? Do they feel bad for the Government?
2 Likes
We do, however, often discuss ways that lower the buy out price at any point prior to lease end (see discussions regarding mf mark ups).
It’s incorrect speculation that a lease contract with or without a purchase option would have identical payments. There’s zero proof that’s true,
Also I think you’re confusing “negotiable” vs “non-factor”. If it’s in the contract, it is 100% a factor. It’s like deposition (and acquisition fee) fee is also non negotiable and goes into how they price the lease deal… is it true that IRS capital leases is outside your domain area or do you have some novel guidance there?
I think I included enough pointers for people seriously looking to understand how the IRS would view it (understand you view it differently), folks should discuss with your CPA if you have more questions.
The cost basis of the lease+option+exercise is bundled together, so lease payments + buyout = cost basis for the bundle. The combination of all three components is exchanged for a car. The car inherits that cost basis.
It’s incorrect to think about buyout as cost basis because in a scenario where you put $90k DAS (downpayment + one pay etc) in a 12 year one-pay lease and buyout is a $100 the next day, that $100 is not the cost of the car. Without the lease, they’re not willing to sell you that one day old car for a $100 and you paid more than that to cause the car to be owned by you. (Using extreme example to make this more clear).
Also consumers can’t deduct depreciation on assets, so the fact that an asset depreciated does not impact consumer cost basis. If you’re a business then you can’t double dip and your cost basis is the above less any tax depreciation you already deducted from prior income taxes.
none of this is tax advice and folks should consult their own CPAs.
1 Like
Thank you for your assumption but i have been in the industry for more than a decade and there is a clear difference between a Capital Lease transaction (common for expensive business assets) & a Close-End lease (a typical car lease transaction).
From the article above,
" In order to be considered a capital lease, the Financial Accounting Standards Board (FASB) requires that at least one of these conditions must be met:
- Title to the equipment passes automatically to the lessee by the end of the lease term
- The lease contains an option to purchase the equipment at the end of the lease at a bargain price, for substantially less than fair market value; sometimes this is a $1 purchase
- The term of the lease is greater than 75% of the useful life of the equipment.
- The present value of the lease payments is greater than 90% of the fair market value of the equipment."
None if this is true for a typical auto lease. Therefore, i had attached a link to the article below regarding Close End Lease.
“A closed-end lease is a rental agreement that puts no obligation on the lessee to purchase the leased asset at the end of the agreement.
The lease terms in a closed-end lease are more restrictive but the lessee does not assume the depreciation risk of the asset when the lease is over.
Closed-end leases, along with open-end leases, typically apply to leases for vehicles.
Usually, a closed-end lease comes with a fixed rate and a term that may run 12 months to 48 months.”
As you can clearly see the stark difference between the two types of leases & hope you can see how a typical lease transaction is clearly a “Close-End Lease”.
I am not going to assume that “Leases” are out for your domain but it’s sure looks like you’re mixing up your leases & Accounting principles.
Incorrect. As i have pointed out multiple times, lease payments can’t be treated as payment towards purchase of the asset & will not give you cost basis. Lease payments are rent payments, rent payments do not give you basis in the asset you’re renting.
The whole concept of a Close-End Lease is to give “limit” your liability & transfer the risk to the lessor.
The picture is from “actual” lease contract that clearly states you have no ownership right unless you excercise the option. Thus making your lease payments a true rental payment.
1 Like
This thread has a lot of fascinating arguments trying to twist a property contract into a financial instrument (which as was discussed the last time it came up, it isn’t - and you’ve shared a lot about treatment of what it actually is), and the possible math of exercising your purchase option at some point in the lease to capture the equity, and what might be taxable.
A better example to consider might be something like
The instances where 2 or less payments were made on a new lease, it’s sold, and depositing the proceeds triggers a Currency Transaction Report with the IRS.
While the IRS can’t be ignored, the states revenue agencies are more concerning, because they can get access to DMV transactions as well as other state data sources that the IRS wouldn’t get.
I ask that question anytime I’m being issued a check over $600 (because the law says a business needs to issue one for any payment to an individual or business over that amount, even if they often don’t), “will you be sending me a 1099?”
1 Like
That was not my intention, but as the argument progressed, it was the closest thing i could compare it to.
That wasn’t directed at you. I could have edited what I said better.
Not taken personally & figured i could some explanation to clarify it a bit more.
Decade of experience with filing capital gains forms for lease buyouts? Decade of experience with IRS rulings on “closed end leases” (where is that in the tax code?)
This whole thread assumes you exercise and ultimately become an owner. You’re assuming payments made prior to holding ownership can’t possible impact cost basis and that’s manifestly not true. simplest example is layaway type programs with non-refundable installments and contract says no ownership until all payments made.
Uh that’s how you have equity, FMV=Third party purchase offer, FMV>buyout= equity.
Not that FASB matters at all for federal tax code, but if you want to bring it up under FASB a “closed-end” lease is not a type of lease: the only two types are operating or capital lease.
Anyways I’m done here, zero need to convince one particular poster otherwise, and won’t be replying further since I think I’ve been sufficiently clear here.
Yes ignorance is bliss & I am not replying to convince any one person, including you, but provide the community with enough information that they can make their own decisions.
You’ve been sufficiently clear with your opinions but have ignored everything backed up with verifiable source.
For, example # 1,
In this requirement of a capital lease, you completely ignored the key word(s) or phrase stating that “at a bargain price, for substantially less than fair market value”, thus buying at stated RV is not significantly less than FMV be or anywhere close to a bargain price.
Example #2,
Again mixing up totally different types of contracts (lease = rental contract v layaway = purchase contract).
"What Is Layaway?
Layaway is a purchasing method in which a consumer places a deposit on an item to “lay it away” for later pick-up when they are financially positioned to pay off the balance. Layaway also lets customers make smaller payments on the product until the purchase is paid in full. A layaway plan ensures the consumer will get their chosen merchandise once it’s fully paid."
For example # 3,
For your kind information, congress doesn’t always create rules for everytype of transactions, it relies on widely accepted accounting principles & provides specialized rules when necessary. There your assumption that FASB doesn’t matter for tax code is false.
Below text explaining capital lease is directly from the IRS website & manual, feel free to let me know if it reads or sounds familiar, also attaching link for reference,
"1.35.6.4.7** **(07-26-2016)
Assets Under Capital Leases
-
The IRS accounts for capital leases according to SFFAS No. 5, Accounting for Liabilities of the Federal Government, and SFFAS No. 6, Accounting for Property, Plant, and Equipment.
-
A lease is classified as a capital lease when the award line is equal to or greater than $50,000, the useful life of the asset is two or more years, and the lease meets at least one of the following criteria at inception:
-
The lease transfers ownership of the personal property to the lessee by the end of the lease term.
-
The lease contains an option to buy the leased property at a bargain price.
-
The lease term is equal to or greater than 75 percent of the estimated useful life of the leased property.
-
The Net Present Value (NPV) equals or exceeds 90 percent of the fair market value of the leased property."
Lastly,
I think the community understand what “industry” i am referring to.
Per the explanation of close end leases (referenced multiple times above), it clearly states that they are type of a rental agreement, thus you should reference the rent section in the IRC (Internal Revenue Code = the tax code).
And again, i am not replying to convince you or anyone else. I am just trying to provide enough information that can help someone to compare the other side of the thinking process & make their own decision as they see fit.
3 Likes
Who is talking about buying at RV here? All of these sales/purchases generating equity are being done prior to lease termination, where the RV isn’t relevant, and are being done at significantly less than FMV (which is the whole reason there is equity).
1 Like
That whole conversation & stated requirements is about “Capital Leases” & the poster ignoring the large part of the requirement in his or her response.
Also, the classification of a lease as a “Capital LEase” or a “Close-End/Rental Lease” is done at the time of the execution of the agreement not after the fact as clearly stated in the IRS requiremetns
So at the time of execution of the lease contract, the RV is the most reasonable FMV of the asset thus not fitting in to the critria required for a transaction to be consided a “Capital Lease”.
OR the IRS requirements,
Your quoting of FASB guidance on categorizing leases seems erroneous here.
FASB is the board that sets standards and practices for financial accounting not taxation. Rules on classifying certain leases as fixed assets as opposed to liabilities on an entities balance sheet has no bearing on how the IRS categorizes leases for tax purposes.
In regard to the matter at hand, here is an article I found discussing the treatment of purchase options in leases.
https://www.ccim.com/cire-magazine/articles/lease-option-or-installment-sale/
What seems most applicable to our auto leases is that the option price consistently gets reduced with each rent payment and that a portion of rent payments can be identified as market interest on loan. Both of these factors indicate an original sale and that the renter or lessee is acquiring equity with the lease payments.
1 Like
While i used the FASB guidance at that point was just to show what an actual capital lease transaction means, but if you see the post just above yours, I also quoted the IRS guidelines which read almost similar (wont say exact but it is pretty close).
Again, the discussion I was having with the poster was about difference between the types of leases.
I am happy to discuss the facts of the article & show how they are essentially referring to “Capital Lease” transaction & not a “Close-End Lease” transaction, but i think it might be an overkill.
Where are you getting that there is a difference between a capital lease or closed end lease with regards to sale classification?
if you go to earlier posts, there has been a detailed discussion about what scenarios can be considered depending how the transactions is structured.
However, the discussion is not about how to classify the “Sale Transaction” but about what is the true cost basis of the transaction and what can be included in determination of the cost basis but that is when one of the poster raised the issue of Capital Leases & Lay away agreements thus needing to provide clarifications about the requirements of such transactions.
1 Like
Wow…lot of discussion here. What’s the conclusion then? Does it need to be reported on tax return?
Talk to your local tax professional about your state’s laws.
1 Like