Operating vs Capital Leases

I often speak with Drivers who have questions about their lease agreement and whether or not its a capital or operating lease and how it effects their taxes and business strategy.

Capital Leases are those in which there is ownership, or implied ownership. There is no hard and fast standard per the IRS but several accounting bodies regard a capital lease as one that consumes 75% of the life of the asset, has a buyout option, and the present value of lease payments discounted at the appropriate rate exceed 90% of the fair market value of the the asset.

Capital leases are similar from a tax perspective as a loan purchase, in that you are claiming the depreciation of the asset in conjunction with claiming the interest portion of lease payment. When you sell the truck you will have to recapture any depreciation and have capital gains on that amount, but you can avoid that with a 1031 exchange and roll it over into another truck.

Operating leases are the traditional lease where you write off 100% of the lease payment but have no claim to the asset, meaning there is no capital gains to be considered but that means there is no asset in the business to depreciate.

If you have more questions regarding your lease or how it impacts your business taxes feel free to give us a call at (720) 593-1829.

Thanks and drive safe!