Machinery rental examples
• Geraldo enters a three-year operational lease for a new tractor with PDQ
Leasing Partnership. The terms of the lease are such that at the end of the
lease Geraldo must return the tractor to the leasing company. The lease
allows 500 hours of engine time per year (1,500 hours in total) at a cost of
$50 per hour. If Geraldo uses the tractor more than the 1,500 hours, he
pays $85 per hour for the overage. Geraldo is required to cover the tractor
with insurance, but the maintenance and repair costs are covered by the
leasing company. This year, Geraldo pays $25,000 to lease the tractor. He
must issue a Form 1099-MISC to PDQ Leasing because it is a partnership
and not a corporation. Geraldo uses Line 24a, Schedule F to report and
deduct this true operational lease.
• Bernadette enters a three-year lease for a combine. The lease agreement
requires Bernadette to pay $175,000 each year and then provides the
option purchase the combine for $15,000 at the end of the lease.
Bernadette is required to insure, maintain, and repair the combine over
the lease term. Because of the construction of the lease terms and the
very low purchase price at the end of the lease, this lease is a capital lease
and IRS will likely treat it as a combine purchase which should be
depreciated.