What are some lease provisions that would cause a lease to be classified as a non-tax-oriented lease instead of a tax-oriented lease?
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What are some lease provisions that would cause a lease to be classified as a non-tax-oriented lease instead of a tax-oriented lease? |
Explanation
A lease that does not meet the guidelines of the IRS regarding lease agreement is termed as a non-tax oriented lease. The ownership of the asset under a lease agreement resides with the lessor but he/she cannot avail the tax benefits.
The lease should not meet the following guidelines issued by IRS regarding lease agreements to be considered as non-tax oriented lease:
The time period decided for a lease agreement must not be more than 80% of the total life of the equipment leased or the remaining useful life of equipment left after the end of agreement must not be less than one year.
The estimated value of equipment left after the end of the agreement must not be less than 20% of the total value of equipment at the time of entering the agreement.
The lessee or any related party to the agreement must not hold the right to purchase the equipment leased at a predetermined price, time period and conditions.
The lessee or any related party to the contract must not pay or guarantee any payment on any part of equipment, that is, the lessee or the related party has not made any investment on the equipment within the time period of lease agreement.
The equipment must not be defined as a limited use property that is, it cannot only be used by the lessee or any related party to the agreement. Any outsider to the agreement must also be allowed to use the equipment.
Verified Answer
A lease that does not fulfil the guidelines issued by internal revenue service (IRS) regarding lease agreements are called non-tax oriented lease.
If a lease meets all of the specified guidelines, it will be considered as a tax-oriented lease otherwise it will be a non tax oriented lease. The guidelines issued by IRS are:
The lease term must not exceed 80% of estimated useful life of equipment at the commencement of the lease agreement.
The estimated residual value of equipment at the expiration of lease must not be less than 20% of its value at the commencement of lease.
The lessee or any other related party in the agreement must not acquire the right to purchase the equipment at a predetermined price.
The lessee or any other related party in the agreement must not make any investment in the equipment.
The equipment must not be defined to be used by the lessee or any related party to the agreement only.
