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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Leveraged Leases

If you are the lessee in a transaction referred to as a leveraged lease, you generally can deduct your lease payments.

Leveraged lease A 3-party transaction in which the landlord (lessor) obtains financing from a third party and in which lease payments are sufficient to cover the cost of repaying the financing. Also, the lease term generally covers the useful life of the property.

It is important that the lessor, and not the lessee, be treated as the owner of the property if lease payments are to be deductible. The lessor is treated as the owner if he or she has a minimum amount at risk (at least 20%) during the entire term of the lease and the lessee does not have a contractual right to buy the property at its FMV at the end of the lease term. Other factors that are necessary to show that the lessor and not the lessee is the owner of the property are that the lessor has a profit motive (apart from tax benefits), the lessee does not lend money to the lessor, and the lessee does not invest in the property.

If you are about to become the lessee of a leveraged lease and want to be sure that you will not be treated as the owner (which means your rental expenses would not be deductible), you can ask the IRS for an advance ruling on the issue. (However, the IRS will not issue an advance ruling on leveraged leases of so-called limited use property.) There is a user fee for this service. It may be advisable to seek the assistance of a tax professional in obtaining ...

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