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My husband and I sold our small business in 2007. We signed

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My husband and I sold...
My husband and I sold our small business in 2007. We signed an agreement to lease-purchase a sign that is not scheduled to be paid for until February 2009 (the new owners did not want the sign). Can we deduct the amount we have paid for the sign in 2008 and 2009 on our personal incomes taxes (schedule C) even though we no longer own the business?
Submitted: 8 years ago.Category: Tax
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2/1/2009
Tax Professional: MequonCPA, Certified Public Accountant (CPA) replied 8 years ago
MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,342
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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DearCustomer-

 

Depending on the lease end buyout, lease purchase contracts are usually depreciated based on cost, not expensed for the lease payments.

 

Assuming the sign is no longer in service, the depreciaton would be suspended after you ceased business.

 

Do you have the sign in your possession.

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Customer reply replied 8 years ago

The sign is no longer in service. The sign is in our possession, but the cost of breaking the contract we signed was not worth it - so we have continued to pay monthly for a sign that is basically useless.

 

The agreement was that we make 36 payments of $252 + tax. At the end of the term, we pay the "buy-out" fair market value of $600.00 and the sign will be ours, or we can box it up and ship it back to the manufacterer, which I am sure would cost more than $600.

 

For 2006 and 2007, our CPA has not been depreciating the sign but having us expense out the monthly payments as a "rental equipment expense." After reading our lease agreement, she said that was the appropriate thing to do. FYI we were sole proprietors.

Tax Professional: MequonCPA, Certified Public Accountant (CPA) replied 8 years ago

Dear abbrown -

 

Based on the information you have provided, the transaction seems to be a conditional purchase. The cost would be capitalized and the property depreciated. The imputed interest would also have been deductible. When the property was taken from service, depreciation would have been suspended. When you ultimately disposed of the property, you would had reported a loss using the sign's remaining basis. See pages 8-9 of IRS Publication 535 (link below)

 

http://www.irs.gov/pub/irs-pdf/p535.pdf

 

But that is the past. At this point, you should keep a record of the payments made in 2008 and 2009. These amounts will be your basis. If you sell or give away the sign, you should have an ordinary loss once it has been disposed.

MequonCPA
MequonCPA, Certified Public Accountant (CPA)
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