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CGCPA
CGCPA , CPA
Category: Finance
Satisfied Customers: 3819
Experience:  40+ years experience in taxes and financial planning
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I have a client with a carpet cleaning business. They lease

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I have a client with a carpet cleaning business. They lease the vans with a buyout at the end. What is the proper accounting for this and accompanying tax laws. Can the monthly payment be expensed at Equipment lease? Then what happens should they decide to exercise the buy out option -- value of the fixed asset etc.
Submitted: 2 years ago.
Category: Finance
Expert:  CGCPA replied 2 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

 

If the lease buy out as stated in the contract is approximately equal to the market value of the equipment (estimated) you should capitalize and depreciate the vans. However, if your clients have no interest in electing the buy out then simply expense the lease payments. Should they subsequently change their minds it will not matter since the expense, over time, will be the same. The advantage of capitalizing and depreciating the vans is that the depreciation method selection process can provide greater expense in the early years. If you are expensing the lease payments and the client elects to purchase the vans, the basis will be the purchase option price paid and you will then depreciate that.

Customer: replied 2 years ago.


If you capitalize how do you determine the split between interest and principal on the monthly payments?


 

Expert:  CGCPA replied 2 years ago.
In practical terms many do not bother to do this. Probably guessing that interest and depreciation are both expenses and it will not make any real difference. However, the simplest way to do this correctly is to use an amortization calculator. There are many on the internet and sometimes write up packages have them as well. The online ones are generally free and you can print the results. You should also consider asking the salesperson or leasing company for a base number and interest rate. They need to do this as well.
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