CLFP - Classification & Terminology in Leasing Questions With 100% Correct Answers.

Helps avoid tax abuse by defining what is not a lease for tax purposes. - What is significant about IRS Revenue Ruling 55-540? Per IRS Revenue Ruling 55-540, what are the rules that if present prevent a transaction from being a lease for tax purposes? - 1). Any portion of the periodic payment is equity, 2.) lessee automatically acquires title upon making scheduled payments 3.) the total amount, which a lessee is required to be paid is an inordinately large portion of the total sum to buy the equipment, 4.) Nominal purchase option 5.) some portion of the payment is designated interest What are the tax benefits of a lease for the LESSOR? -1.) all rental streams would be taken into income, 2.) tax credits 3.) Allowable depreciations What are the tax benefits of a lease for the LESSEE? -all rental payments can be treated as operating expenses and be not subject to federal tax What is IRS Revenue Procedure 75-21? - Created in 1975, it was designed to fix the shortcomings of IRS Revenue Ruling 55-540 which tried to defined a contract of sale but did not did not include the attributes of a lease. Per IRS Revenue Procedure 75-21, and later changed by Revenue Procedure 2001-28, what are the attributes of a lease "for advanced ruling purposes only"? - 1.) Risk - lessor must contain unconditional risk during term; 2.) Right to Buy - Lessee may not have a right to buy at less than FMV, 3.) Investment: The lessee may not invest in the property;4.) Loans: The lessee may not lend money to the lessor to buy the property; 5.) Profit: The lessor must show it is making a profit apart from the tax deduction What may a transaction be labeled if it does not qualify for as a lease per Revenue Procedure 2001 -28? - Financing, conditional sales contract, a capital lease, a finance lease, a lease intended for security, money over money transaction or purchase money security agreement, loan or non-tax lease. Does Revenue Procedure 2001-28 help in determining federal tax treatment of a transaction? - No. This procedure is used for "advanced ruling purposes only" and does not help with federal tax treatment and should not be used for audit purposes What is the purpose of FASB? - To guide the format or financial statements and GAAP. What is FASB #13? - Issued in 1976, it set fourth 1.) four criteria by which to classify a lease as either a capital lease or an operating lease, 2.) how each was to be treated on the financial statement, 3.) for both the lessee and lessor What later replaced FASB 13? - Accounting Standards Codification replaced with ASC 840 (2009) Per ASC 840, what is a capital lease? - A lease with a purchase agreement and also meets any one of the four (4) criteria requirements. How is the lessee supposed to account for a capital lease? - 1.) Show the equipment as an asset and 2). show the stream of payments as their respective portion of short and long term debt. 3.) Only the portion of the payment that is related to interest and depreciation can be expensed How is a lessor supposed to account for a capital lease? - 1..) Show the stream of payments as a lease receivable (capitalize) and 2.) may only take into income the portion of the payment applicable to interest.Per ASC 840, what is a operating lease? - A lease that has characteristics of usage and does not meet any of the four (4) criteria requirements. How is a lessee supposed to account for an operating lease? - 1.) Do not report the asset on the balance sheet and instead reports the full periodic payment as an expense. 2.) Must also disclose the obligation in its financial statement notes. How is a lessor supposed to account for an operating lease? - 1.) Show the property being leased as a fixed asset. 2.) All the period income payments are taken into income and 3.) the initial direct cost must be capitalized and later expensed over the lease term. Per ASC 840, what are the four (4) criteria used to determine lease status from an accounting perspective? None can be met for operating lease status. - 1.) Title automatically transfers to lessee at end of lease; or 2.) Contains a bargain purchase option; or 3). The lease term is = 75% of the assets useful life; or 4.) The PV of the payments at lease inception are = 90% of the FMV of the property When conducting ASC 840 criteria testing on a transaction, what rate is used in the minimum lease payment PV calculation -Discount rate for the lessor and the incremental borrow rate for the lessee What is ASU 2016-02? - 1.) FASB/GAAP change that calls for operating leases to be reported on the balance sheet and eliminates the distinction between finance and operating leases. 2) lessee can use term, payment and incremental borrowing rate to capitalize asset to offset liability 3.)Lessors will have to be aware lessee obligation is no longer off balance sheet and change sales and underwriting techniques From a legal perspective, why is it important properly classify a lease? - To determine who OWNS the asset.What is Article 2A of the UCC? - Defines a lease as "a transfer of the right to possession and use of a goods for term in return for consideration, but a sale, including the sale on approval or a sale on return or retention or creation of a security interest, is not a lease" Which UCC articles govern leases or loans? - Article 2A = Lease Article 9 = Loan What is a Consumer Lease? - As defined by Ariticle 2A of UCC, a lease that a lessor regularly engaged in the business of leasing or selling make to a lessee, except an organization, which undertakes a the lease primarily for personal, family or household purpose. What is a Direct Finance Lease? - As defined by Article 2A of UCC, this is a majority of leases in the industry in which 1) the lessor does not select the supplier of the goods 2.) the lessor acquires the goods 3a.) lessee receives a copy of the contract evidencing the lessor's purchase of the goods prior to signing the contact; 3b) lessee's approval of the vendor is part of acceptance of the lease contract; or 3c) the lessee is provided in writing identifying lessee, their rights and warranties What is a Purchase? - As defined by Article 2A of UCC, The taking of a sale, lease, mortgage, security interest, pledge, or other voluntary transaction that creates ownership interest in the goods. What is a sublease? - As defined by Article 2A of UCC, is an agreement in which the lessee in teh lease assigns the lease, including right to possession and use of the asset to a third party making the original lessess sub-lessor and the new lessee a sub-lessee