Leasing assets involves a number of tax and accounting considerations,which are examined in this section.
Tax Status of True Leases
Annual lease payments are tax deductible for the lessee if one crucial criterion is met: The IRS must agree that a contract truly is a lease and not just an installment loan called a lease. Before embarking on a lease transaction, all involved parties should obtain an opinion from the IRS regarding the tax status of the proposed lease. The opinion of the IRS normally revolves primarily around the following general rules:
If the IRS does not agree that a contract is truly a lease, taxes are applied as if the property had been sold to the lessee and pledged to the lessor as security for a loan. The reason for the IRS restrictions previously cited is that the IRS wants to prohibit lease transactions set up purely to speed up tax deductions. For example, a building would normally be depreciated over 39 years under MACRS depreciation rules.
It would be possible to set up a lease over a 3-year period that allowed the lessee to effectively write off the cost of the building for tax purposes over 3 years. This would increase tax deductions for the lessee at the expense of tax receipts to the U.S. Treasury. These IRS guidelines are designed to prevent this type of abuse.
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Financial Management Tutorial
The Role And Objective Of Financial Management
The Domestic And International Financial Marketplace
Evaluation Of Financial Performance
Financial Planning And Forecasting
The Time Value Of Money
Risk And Return On At&t Common Stock
Fixed-income Securities: Characteristics And Valuation
Common Stock: Characteristics,valuation, And Issuance
Capital Budgeting And Cash Flow Analysis
Capital Budgeting: Decision Criteria And Real Option Considerations
Capital Budgeting And Risk
The Cost Of Capital
Capital Structure Concepts
Capital Structure Management In Practice
Working Capital Management
The Management Of Cash And Marketable Securities
Management Of Accounts Receivable And Inventories
Lease And Intermediate-term Financing
Financing With Derivatives
Internationan Financial Management
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