July 30, 2010 12:00 am

Leased Vehicle Ineligible for Sec. 179 Expensing

The cost of vehicles purchased for business can be recovered by expensing (limits may apply), which provides a greater up-front write-off than depreciation claimed over a number of years. In one recent case, a business owner who leased a truck argued that his lease arrangement amounted to a sale that should be entitled to the same tax treatment as that afforded to an outright purchase. The Tax Court disagreed.

The arrangement that the owner signed was called a “motor vehicle lease agreement-closed-end.” It required him to pay a fixed monthly amount over a 48-month term. It limited driving to 11,294 miles per year, with a charge of 18¢ per mile over that limit. He was required to maintain the vehicle, have insurance, and pay all taxes connected to the truck. At the end of the term, he could pay a termination fee of $395 to give up the truck or a fixed payment of $17,612 to acquire unconditional ownership.

The Tax Court decided that this was a mere lease agreement and he did not have the requisite ownership to claim Sec. 179 expensing. Here, the lessor retained “significant and genuine attributes of traditional lessor status”; the transaction was not merely a secured sale arrangement. The lease did not extend through the useful life of the equipment, but was limited to 48 months. The lease was an open-end lease, with an option to purchase; the lessee could not be compelled to purchase.

Source: Arthur E Boyce, TC Summary Opinion 2010-100

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Tax Glossary

Personal interest

Tax term for interest on personal loans and consumer purchases. Such interest is not deductible.

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