Discussion:Is the EBO a Bargain Purchase?
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Discussion Forum Index --> Tax Questions --> Is the EBO a Bargain Purchase?
| 4 February 2008 | |
| In reviewing recent lease scenarios for operating vs capital I commonly see early buyouts that appear to possibly be bargain purchases. Here is an example:
Lease specialized John Deere tractor for $274,309, for 60 months at $4,197 per month with an early buyout option at the end of 48 months specified as $116,362. If the early buyout option is not taken the equipment can either be purchased at FMV at the end of the lease term or returned to the lessor. Based on the criteria, this is less than 75% of life, does not transfer ownership, minimum lease payments excluding the buyout scenario are approx. 80% of FMV. The estimated FMV of the equipment at the four year mark is difficult to assess for certain but similar used equipment does hold a good resale value (see ask price listings for $125-175K). The lessor has essentially built in a financed recovery of the original price and tried to structure an operating lease at the lessee's request The question is - given that the option to buy is attractive at the 4 year mark because the alternative is to continue making payments for another year with little or no return - is this a capital lease? | |
RoyDaleOne (talk|edits) said: | 4 February 2008 |
| Is this a tax question or a GAAP question. | |
