Disposal of Leased Equipment

[Bookkeeping2022]

I have several questions regarding an independent trucker, Schedule C filer.  In October 2019 he leased a truck under an operating lease, 50 month term, $179,000 acquisition cost, $14,000 downpayment.  As the lease document was clearly identified as an operating lease, I deducted his lease payments instead of depreciating the truck, unaware the lease had a purchase option.  I also failed to deduct the $14,000 downpayment.   In November 2022, he decided to leave trucking and ‘sold’ the truck to an equipment company.  At this point he had paid $ 110.450 on the lease ($14,000 + monthly payments) and would have had 14 months remaining payments on the lease. After all sale/transfer related expenses were paid, the equipment company paid him net proceeds in the amount of $43,500.  My questions are:  Can he deduct the $14,000 downpayment paid in 2019 on his 2022 taxes?   And, other than normal operating expenses and lease payments made in 2022, is there any other way to offset the tax hit from the $43,500 sale proceeds?   Also, as I didn’t  treat the truck as depreciable asset in previous tax years, I’m assuming I would need to enter the sale proceeds in TurboTax under Business Income: either General Income or Other Income?  Thank you.

[Mike9241 · Accepted solution]

it would seem you have a capital lease under IRS rules despite it being labeled as an operating lease 

Assets Under Capital Leases

1. The IRS accounts for capital leases according to SFFAS No. 5, Accounting for Liabilities of the Federal Government, and SFFAS No. 6, Accounting for Property, Plant, and Equipment.

2. A lease is classified as a capital lease when the award line (value) is equal to or greater than $50,000, the useful life of the asset is two or more years, and the lease meets at least one of the following criteria at inception:

   1. The lease transfers ownership of the personal property to the lessee by the end of the lease term.

   2. The lease contains an option to buy the leased property at a bargain price.

   3. The lease term is equal to or greater than 75 percent of the estimated useful life of the leased property. (useful live 5 year lease term 50 months that's 83%)

   4. The Net Present Value (NPV) equals or exceeds 90 percent of the fair market value of the leased property.

3. The amount capitalized is the amount recognized as a liability, determined as the lesser of the NPV of rental and other minimum lease payments, excluding executory costs, or the fair market value of the leased asset. The NPV is determined by using the nominal interest rates published in Appendix C: Discount Rates for Cost-Effectiveness, Lease-Purchase and Related Analyses for OMB Circ..., which is updated annually.

4. Assets under capital leases are depreciated over the useful life of the asset.

5. Leases not meeting the criteria for capital lease are operating leases and are expensed.

it would seem you have a capital lease that started in 2019. this will require you to amend 2019 through 2021.

that $14K is not deductible in 2022

[Bookkeeping2022]

Thanks so much for your detailed response. Now I know exactly what I need to do.