A nontax lease is any lease in which the lessee is considered the owner of the leased asset for tax purposes, it being treated as a loan in which the lessor has a security interest in the leased asset. Because primary control over the asset is provided to and its ownership is ultimately transferred to the lessee, the lessee is considered the owner of a nontax lease. In general, a nontax lease is utilized when the lessee can use of an asset for its economic life and take full advantage of the tax benefits of ownership, including the ability of the lessee to depreciate the cost of the asset, to expense the interest paid, and to claim any investment tax credits.
Nontax Lease = Lessee Claims Tax Benefits of Asset Ownership
Nontax leases are treated as financing in which the lessor has a security interest in the leased assets. As with a conditional sale, the lessee in a nontax lease has possession and use of the asset while the lessor retains its legal title until the lessee makes the final lease or sale payment, after which the lessor transfers title to the lessee/buyer. Micro- and small-ticket leases are typically conditional-sale, single-investor nontax leases. Any conditional sale, synthetic lease, or lease with a bargain purchase or bargain renewal option is a nontax lease under US tax law.
| Nontax Leases under US Tax Law |
|---|
| Conditional sale |
| Synthetic lease |
| Split TRAC lease |
| Lease with a bargain purchase option |
| Lease with a bargain renewal option |
| Master trust structure with participation interest |