IRS Tax Guidelines

The IRS isn’t specific on what differentiates a true lease from a conditional sale. Each case is decided based on its own circumstances. Generally, a transaction is considered a true lease if you follow a few simple guidelines. The following points are not necessarily a comprehensive listing of IRS guidelines for leasing, but will provide a general idea of the areas looked at in determining whether a transaction is a lease rather than a conditional sale.

  1. The term of the lease shouldn’t be longer than the property’s economic life.
  2. Your lease payments can only amortize the value of the equipment that is actually used, not necessarily its total value. The leasing company needs to demonstrate an appropriate level of risk for the property from the beginning to the end of the lease.
  3. If you decide to buy the equipment at the end of the lease, you can’t pay less than its fair market value.
  4. The leasing company must expect a financial return from the lease beyond the inherent tax benefits of ownership.
  5. You may not loan the leasing company the funds or guarantee the debt used to acquire the leased equipment.
  6. You can’t furnish any part of the cost of the leased equipment, such as trade-ins or down payments.

Be sure to consult an accountant about which type of lease is right for you.