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Client does not take buy out option-cap lease

Technical topics regarding tax preparation.
#1
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Does anyone know what happens if at the end of a capital lease that originally met all the requirements for recording an asset on the lessee's books, that the lessee decides not to buy it but continues to lease/rent it. Would I remove the asset without any gain or loss and then just continue with rental payments in full? Not saying it is the best decision on the client's part but...
 

#2
Nilodop  
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If I understand you, there was an option to buy, the exercise price was more than negligible yet low enough that the lease still had to be capitalized for tax purposes, there is still some remaining tax basis, and the asset (is it machinery or a building or what?) is used in a trade or business or an activity for profit. And the terms of the ongoing lease do not require capitalization, right? If all that is so, I admit it's a new one on me.

But that won't stop me from guessing. My first reaction was that he has abandoned the asset and gets an ordinary loss deduction for its remaining basis. But my guess is that you'd be hard pressed to show abandonment when you still use the asset, so ditch that for now. Maybe when the client actually stops leasing it, but not now.Then I wondered if the end of its tax depreciation life has not arrived, can you still depreciate it, and I'm guessing you can, but it's odd since you no longer have ownership for tax purposes.

If there is no tax basis left, the answer is easy.

I suggest researching it but I think it will be hard to find a ruling or case like it.
 

#3
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Orangedream wrote:Does anyone know what happens if at the end of a capital lease that originally met all the requirements for recording an asset on the lessee's books, that the lessee decides not to buy it but continues to lease/rent it. Would I remove the asset without any gain or loss and then just continue with rental payments in full? Not saying it is the best decision on the client's part but...


Now, IMO, you have 2 different "things".

The asset stays on the books. He bought it under GAAP and TAX cap lease accounting. He chose NOT to rent it at the end of the term or he did. Separate issue.

If he still has the asset, leave on books and continue to depreciate it. If not, discard and recognize G/L. If fully depreciated, I would simply remove it as he has no title to it any longer.
 

#4
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I can try to clarify - the lease term is pretty consistent with the recovery for tax period. So, it would be at $0 tax basis by the time he can decide to purchase it or continue renting it. The concept of it confuses me in that he doesn't own that asset anymore if he doesn't select the buy out option. But he still wants to lease it and I'm not sure if I can deduct the lease payment that time. Seems like I should be able to.
 

#5
Nilodop  
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OK, so we have more facts, and this is prospective, not past. Is there any relationship between lessee and lessor, such that the decision not to exercise his option may not be all business-driven? Absent that, and having no remaining tax basis and no ownership, what possible law would stop him from deducting the ongoing rent?
 

#6
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Nope, no relationship - just a little lack of business common sense. He actually hates the leasing company - its a food truck, like for barbeque vendors at a fair or event.
 


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