Posted February 10, 2015
The Ohio State University’s Agricultural Law & Taxation blog published an article on Leasing, Conditional Sales Agreements, and the Future of Section 179.
The Internal Revenue Code (Code) allows an annual deduction of a portion of the cost of the property. This deduction may be a deduction for depreciation, amortization or depletion. There are two exceptions to the aforementioned rule. The first exception is the section 179 expense deduction and the other exception is the Accelerated First Year Depreciation (AFYD).
For lease payments to be deductible as a business expense, the lease agreement must be a Tax-Oriented True Lease. If there are any factors present that show that the payments are intended to be creating equity in the equipment, the agreement will be deemed to be a conditional sales agreement. The payments pursuant to a conditional sales agreement are not deductible business expenses and the equipment is not depreciable unless the purchaser is considered the owner.
The importance of this issue depends on when Congress addresses the section 179 expense deduction and AFYD. If Congress’ inaction in 2013 and 2014 is any indication, farmers may very well find themselves in the same position of not knowing whether or not to make capital expenditures in 2015. The best possible scenario would be for Congress to permanently establish section 179 at $500,000 and AFYD at 50% to provide farmers with the certainty that they need to make wise business decisions. However, this is unlikely to happen. If a lease is a viable alternative for the farmer, make sure that it is a Tax-Oriented True Lease.
For more information on Leasing, Conditional Sales Agreements, and the Future of Section 179, please visit OSU’s Ag Law and Taxation Blog here.