It depends!! You normally cannot depreciate a leased piece of equipment unless it is part of a conditional sales contract. According to the IRS, a conditional sales contract must contain the following elements to be considered a contract. One or more conditions may 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.
If your lease agreement is not a sales contract, you may deduct lease payments as rent expenses in your business. Please review this IRS source for further information.
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