Trade in of Leased Equipment

I have a new client who has a towing service. I am reviewing their 2024 YTD Quickbooks activity to give them an idea of where they stand for 2024 income taxes. Client is accrual basis.

Client's previous wrecker truck was being leased monthly and prior accountant deducted the monthly lease payments as an operating lease. Upon conclusion of the lease this year, the fair value of the wrecker was $94,000 more than the buyout option on the lease. So client exercised the buyout option, and sold the wrecker back to the lessor (essentially netting $94,000).

Client then turns around and uses $40,000 of sale proceeds to pay off existing loans on other equipment. Remaining $54,000 is then used as a "downpayment" on a new wrecker lease. New lease has a buy out option at the end of 72 months of approximately 39% of the current vehicle price.

In reviewing this, I come to the following conclusions:

Client has a taxable gain on the sale of the previously leased wrecker of $94,000. I am assuming this gain would be treated as ordinary income/short term capital gain?

Client then takes a deduction for monthly lease payments on new lease. "Downpayment" amount is amortized to expense over the life of the lease.

Does that sound right? Definitely seems like they could have structured this a little more favorable for tax purposes.

That sounds correct to me. What more favorable structure would you have suggested?

I was thinking a capital lease or a commercial loan. Interest rate if they were to exercise purchase option on new lease would be around 11%. Likely could have gotten a bank loan for that or better. Would still have the option to sell the equipment after 6 years. Would also have much more flexibility with deducting costs under 179 depreciation.