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I opened An S-Corp last year because I got into a business…

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I opened An S-Corp...

I opened An S-Corp last year because I got into a business in which I'm sub-leasing a Commercial Property which includes 3 retail spaces currently rented. My business transaction was as follows: The original owner of the property leased this property for 99 years (the land and building) to X person. This X person is tired and old and doesn't want the headaches anymore so he subleased this Commercial Property to my s-corp. The lease is for 15 years and the S-Corp paid $ 485,000.00 in which X is financing to my S-corp. At the end of the 15 yrs the S-corp will have the option to purchase what’s left of the 99 years (original owner and X owner) on this property or just walk away. My question is, on the 1120S and on the Corp books do we depreciate this property or we don't do this because it’s a leased property and or agreement?

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

I THINK I EXPLAINED IT ON THE ORIGINAL MESSAGE

Submitted: 7 months ago.Category: Finance
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12/21/2017
Financial Professional: Lev, Tax Preparer replied 7 months ago
Lev
Lev, Tax Preparer
Category: Finance
Satisfied Customers: 33,294
Experience: Personal Investment, Tax Preparation
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We need to classify your lease contract as either purchase or as a rent.

Based on that we will treat your payments as either going toward purchase price and you will depreciate the property OR as rental payments and the X-person will be considered as an owner and he will claim depreciation.

As long as S-corporation has the 15 yrs lease with the option to purchase - it is possible to treat such contract as purchase contract.

.

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Financial Professional: Lev, Tax Preparer replied 7 months ago

Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, which is read in light of the facts and circumstances when it was entered into. Determine the parties' intent based on the facts and circumstances that exist when you enter into the agreement. No single test, or special combination of tests, always applies.

However, in general, you may consider an agreement as a conditional sales contract rather than a lease if one or more of the following conditions apply:

  • The agreement designates part of each payment towards an equity interest that you'll receive in the property.
  • You get title to the property upon the payment of a stated amount of "rental" payments required under the agreement.
  • The amount you must pay to use the property for a short time is an inordinately large part of the amount you would pay to get title to the property.
  • You pay much more than the current fair rental value for the property.
  • You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.
  • You have an option to buy the property for a small amount compared to the total amount you have to pay under the agreement.
  • The agreement designates some part of the payments as interest, or parts of the payments are easy to recognize as interest.

Let me know if you need any clarification.

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