Have to disagree, @AP919. If tax is capped, you will definitely be paying tax on tax. This is not only supported by my post above, but Pub 839 confirms the same. See example 9 at P. 16. Lines 1 thru 7 captures tax on tax; lines 8-13 captures interest on tax. If you’re interested, see my posted image doc above where I discuss this in some detail.
I wish they would have done an example that just discusses those instances where the tax is capped without a loan (i.e., fund provider is funding the adjusted cap which includes tax… no need for dealer to lend the lessee the tax… tax is then paid to NY upfront even though it financed in the lease which is exactly what occurred with the Glen Cove Volvo lease a few years ago).
Thanks for all the information you provided. It’s awesome and I learned a few things!
ADDENDUM…. Let’s put this tax on tax issue to bed. Below is a very compelling argument that definitively proves that tax is levied on tax when the tax is capped in a NY lease…
Pub 839, Pub 839, Lines 1-7, at P.16 calculates the total tax as follows…
Total Tax = [.08/(1-.08)] x 18000 = 1565
The 1565 total tax includes the additional tax on tax which amounts to 125. Here’s why…
**We have tax on the total payments of 18000... .08 x 18000 = 1440**
**PLUS tax on the total tax................... .08 x 1565 = 125**
**TOTAL TAX.............................................. = 1565**