7890 / In general, what are the tax effects of equipment leasing programs?

The primary tax benefit of equipment leasing programs is tax deferral. Deductions for depreciation, interest, and expenses offset rental income from the program and, depending on the amount of deductions, may offset income from other sources. Because an equipment leasing program will generally be a passive activity, such excess deductions (losses) may normally offset only other passive income of the taxpayer (see Q 7902).

Depreciation and interest deductions will decline. Consequently, while there may be tax losses in early years that offset income from sources other than the program, in later years the investor will recognize taxable income that may substantially exceed cash available from the program (“phantom income”). The carryover of disallowed passive losses from earlier years may reduce or even eliminate the phantom income in later years.

Generally, limited partnerships and S corporations act as flow-through entities, and partners and shareholders report their share of the entity’s income, deductions, and credits on their own tax returns (see Q 7732). (Electing large partnerships have somewhat different flow-through rules than regular partnerships (see Q 7733).) However, if a publicly traded partnership is taxed as a corporation, the income, deductions, and credits are reported by the partnership and do not flow-through to the partners. Electing 1987 partnerships are subject to both an entity level tax and the flow-through rules. In general, investment in a publicly traded partnership taxed as a corporation will be taxed as an investment in a corporation. See Q 7728 for the treatment of publicly traded partnerships.