A company is leasing equipment to a third party. This equipment is owned by the company and the company retains one half of 1% (.005) interest in the equipments production. Does the company get to fully depreciate the equipment under this arrangement? Does the company get the benefit of all tax related credits and or other benefits?
wrote
Related or unrelated?
So there's some related party transaction going on.
It sounds to me like the depreciation expense gets capitalized into the cost of the finished goods.
But more diging is needed to verify that.
Like what?
Isn't it as simple as this? The company that owns the equipment gets to depreciate it. Just like a rental, whoever owns the house gets to depreciate it and enter it on their Schedule E. The rent that the owner charges for leasing the property will include the tax break of depreciation. The owner would have to report the rental/leasing income, and the company that leases the property will deduct it as an operating cost. The "one half of 1% (.005) interest" seems irrelevant. Now I could be way off too.
wrote
It's never cut-n-dry. Who owns both companies?
Not if I own the house and I live there.
The problem, as I see it without a ton of research, is the sharing of profits in the production (use) of the equipment. That cracks that unrelated barrier, enough for me to want to look it up (I'm not gonna do it, but you should).
In an "at-arms-length" transaction, yes to the first half, and maybe to the second half. Manufacturers might be required to capitalize their expenses of production into finished goods inventory.
As I said, that cracks the "unrelated" barrier, enough for me to want to look it up (I'm not gonna do it, but you should).
If both companies are related, then it probably won't work like you want it to.
Gentleman,
Thank you for responding. The answer to your questions:
For further understanding of the situation:
The equipment is industrial in function and does NOT produce a widget The Term of the lease is long term (20 years) The company leasing the equipment (owner) buys the equipment from a manufacturer The company then turns around and leases the equipment to unrelated entities The reason the company retains a very slight production right on the equipment is to ensure that the lessee cannot claim ownership (IRS) (is this necessary) There is a question about COGS deductions for the owner of the equipment (leasing revenue minus the cost of the equipment ). Can the owner of the equipment take COGS and depreciation deductions
In advance thank you for responding
========================================= MODERATOR'S COMMENT: Please delete unnecessary text from the prior message when responding.
wrote
News to me. What Code section says that?
I don't see any COGS deduction at all.
At best, all receipts are considered to be rental revenues.
What does that mean?
Does it mean that the lease payment is a fixed amount plus a fraction of the value of stuff produced? Or does the owning company get some of the stuff produced?
Seth
Please see the first WARNING message on this site.
The lessor receives income from the production of the equipment
========================================= MODERATOR'S COMMENT: Please delete unnecessary text from the prior message when responding.
wrote
Sure, where you are, in fact, obtaining all the benefits of owning the equipment and the "lease" is nothing more than a financing method, then you capitalize the equipment purchase and take depreciation. The "sale" is booked in full and the resulting A/R shown, and each payment carries imputed interest.
But no place does it stipulate that you had to obtain some ownership of the machine's production to avoid that.
Maybe someone else sees it differently.
Dick, you might have to write an "if/then" exception to filter those posts out.
snipped-for-privacy@gmail.com wrote: ...
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From the last section of that page--
"If you have any doubt as to how the IRS may view the lease, have your accountant or lawyer review the agreement."
That's probably the best advice on the page. The worst of the page is they generalize from very specific rules w/o providing the reference to those rules so that one can actually read what the rules themselves say rather than whoever wrote the site blurb's interpretation of those rules.
I do not that at least one of the concerns raised isn't present here -- that of short term leases to effectually advance depreciation. But, since the equipment type isn't provided in the original question, is 20 years short/long for the equipment involved or completely arbitrary having nothing whatsoever to do w/ the equipment itself?
It would also seem questionable to me that there was sufficient concern in the setting up of this least that there was a deliberate ploy used to try to skirt a clause--ok, it's pretty clear the actual effort was probably pretty amateurish attempt and doesn't do much, but still... :)
I think OP's best bet here will be to get professional local advice that has access to _all_ the facts and can do diligent analysis of the situation--some opinions from a usenet group may be of some use in understanding issues, but don't think it's likely to provide a definitive response.
imo, $0.02, ymmv, etc., etc., etc., ...
Some of these posts are rejected. Other posters are notified first and then rejected if they don't learn. Sometimes violations are allowed through if the content is particularly helpful.
Stu
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