Applicable rulings to the leasing industry worth noting are IRS Revenue Ruling (RR) 55-540 (1955) and Revenue Procedure (RP) 75-21. Both relate to how the IRS treats a lease for tax purposes, that is, whether it is a lease summarized by the conditions described as necessary for a lease. RP 75-21 addresses the same issue, but from the lessor’s viewpoint. This procedure, which came twenty years after RR 55-540, defines in detail the requirements which must be met with for a transaction to be construed as a true tax lease.
– The lessor must have 20 percent minimum at-risk investment in the property at the inception, during and at the end of the lease term.
– The exercise price of any lessee purchase option must not be less than the fair market value.
– The lessee may not make an investment in the lease, nor can it lend to the lessor any purchase money or guarantee any lessor loans.
– The value of the property’s original cost and the useful life of the property at the end of the lease term must be equal to the greater of (a) one year or (b) 20 percent of the originally estimated useful life.
– The lessor must have positive cash flow and a profit from the transaction independent of tax benefits.