Which one of the following correctly states one of the conditions established by the IRS for a lease to be considered valid for tax purposes?
A)The lease should have high payments at the beginning of the lease period and low payments at the end of the lease period.
B)Any renewal option should be based on a value which is less than the fair market value of the asset at the time of renewal.
C)The term of the lease must be less than 80 percent of the economic life of the asset.
D)The lessee should have the option to purchase the asset at a discounted price at the end of the lease term.
E)The lessor must have a reasonable expectation of earning an aftertax profit.

Question

Quizplus · Accepted Answer

The IRS has established the condition that the term of the lease must be less than 80 percent of the economic life of the asset. This ensures that the lease is not essentially a purchase disguised as a lease. High payments at the beginning or end of the lease, a renewal option based on value below fair market value, and an option to purchase at a discounted price do not necessarily make a lease valid for tax purposes. The lessor's expectation of earning a profit is not a condition for the validity of the lease, although it is a business consideration.

Which One of the Following Correctly States One of the Conditions