Probably a Dumb Question

[S T]

Question, I am looking a a vehicle lease agreement and see that the Schedule C t/p paid $$ for a cap cost reduction,so they can walk away at the end of the lease, in addition to first months lease payment, sales tax on the cap cost reduction, and the DMV fees,

What if anything do we do with the cap cost reduction amount and sales tax?

Sandy

[JG EA]

I'm not sure what a Cap cost reduction is but I'd just refigure the whole thing as a purchase and do depreciation and interest paid each "lease payment". (I know you have Tax Tools and that'll figure it for you in the unknown variable of the Loan Calculation.)
JG

[S T]

Thanks JG, here is what I have found on Cap Cost Reduction. So still

On the vehicle lease the Cap Cost Reduction is an amount paid to the "dealer" (from Federal Reserve.com)

Capitalized cost reduction (cap cost reduction)
The sum of any down payment, net trade-in allowance, and rebate used to reduce the gross capitalized cost. The cap cost reduction is subtracted from the gross cap cost to get the adjusted cap cost. The capitalized cost reduction for a lease is like a down payment when buying a car. The more you pay to reduce the capitalized cost, the lower your monthly payments will be. The trade-off is that you have to pay the cap cost reduction up front, and you may not have the lump sum amount or you may want to do other things with that money. Ask how different cap cost reductions will affect your monthly payment (for example, if you pay $1,000 instead of $3,500, what would your payments be?).

from my autoloan.com

Cap cost reduction / Capitalized cost reduction / Down payment
A deposit on the lease, which reduces the monthly lease payment. This is like a down payment on a car that you finance with a loan. When you subtract the cap cost reductions from the cap cost, you get the net cap cost, also called the adjusted cap cost. In addition to cash reductions, rebates by the manufacturer or the dealer and the net trade-in allowance are also cap cost reductions.

from toyota.com

Capitalized Cost Reduction or Cap Cost Reduction: In a lease contract, the amount of any net trade-in allowance, rebate, non-cash credit, or cash paid that reduces the gross capitalized cost. This is sometimes referred to as a down payment.

So Cap Cost reduction would be like a down payment on a lease, since a lease is another form of financing. However, for tax purposes, we take a lease add back the inclusion amount according to the lease tables and take actual expenses of lease and operating the vehicle (gas, insurance, repairs) and just write them off x the business percentage. When vehicle is turned back in at the end of the lease, no depreciation to recapture, right? Most t/p don't buy out the lease at the end.

So would you depreciate the down payment or simply add the pro rata amount back to the lease payment for the year.

[JG EA]

Sorry Sandy, my comment wasn't very clear.

Since you obviously don't want to use the standard mileage rate, you want to know how much is included in the lease payment.

My point was if this actually is a sale of a vehicle to your client then I would treat it as a sale. Find out the real price by including all costs, time period involved, take out any interest and then count that interest each month. I think this would be easy to do in Tax Tools.

The leases that I have depreciated were actually equipment sales. They met the rules for being considered sales. I have never done one for an automobile so I don't know.

To determine if it is actually a purchase, see page 4 of Pub 946. I tried to find another clearer reference. I can't find the information in TTB.

If your lease isn't a purchase I don't know what it is because I don't know enough about down payments on a vehicle lease. So, you have your problem of how much to include in the lease payment. I hope someone else will jump in.
JG
Your next post is good to know. I learned something from your question.

[S T]

JG, thanks for your help. I also was familiar with the business equipment leases (as we know this is usually a form of purchase and financing) and depreciation, but this vehicle lease I believe to be a "lease" not a purchase. Definintion of the leasing per the auto industry anyway is "When you lease, you are paying for the use of the car, and your payments cover the cost of the vehicle's depreciation over the time you drive it, rather than towards the car's purchase price. The 'lessee' has responsibilities to maintain that car, and when the lease is up you can opt to buy it, or return it."

I finally managed to track down what Cap Cost Reduction actually meant. T/P entered into a Close End Vehicle lease and has no obligation at the end of the lease to purchase the vehicle.

From various sources I found out that now some vehicle leases are requiring a down payment (Cap Cost Reduction) which is nothing more than "monthly payments in advance" to reduce the monthly payment. So this seems to be an "advanced payment" I will deduct the amount of the Cap Cost Reduction and added sales tax and deduct prorata over the term of the lease as noted in Pub 463.

It would have helped if the leasing company and the IRS would use the same terminology instead of Cap Cost Reduction vs advance payments.

Thanks

Sandy