Franchise Tax Board

Leases

 

# Item Check/Date
 
LEASES
 
64.

See R&TC §§17053.49(f) or 23649(f) and CCR, tit. 18, §§17053.49-6 or 23649-6.

 
65. Were any assets acquired by lease? Did the lessor acquire the qualified property on or after 1/1/94? Was the lease commenced with the qualified taxpayer on or after 1/1/94? If no, then the lessee cannot claim the MIC.

Note: Review the taxpayer's financial statements to determine if they have any lease commitments. If they do, ask the taxpayer what assets are leased and to provide copies of the lease agreements.

 
66.
  • Is the lessee a qualified taxpayer?
  • Is the leased property used in a qualified activity described above?

Note: The lessee must be a qualified taxpayer and use the qualified property (the leased property) in a qualified activity. If the lessee does not meet these requirements, they cannot claim the MIC.

 
67.

Is the lease an Operating (True) Lease or Finance (Capital) Lease under California sales or use tax law?

Note: Under sales or use tax law, all leases are deemed to be a finance lease. However, if the lease meets one of the following two exceptions it will be treated as an operating lease.

1) The tangible personal property is:

  • Leased in substantially the same form as acquired by the lessor and/or transferor, and
  • The lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property.

OR

2) A lease not containing a nominal option price. California sales or use tax law generally treats the option price as nominal if it does not exceed the lesser of $100 or 1% of the total contract price.

Note: A lease may be a finance (capital) lease for GAAP/Income Tax purposes and be an operating (true) lease for BOE/MIC purposes.

 
68. Who paid the California sales or use tax on the leased property?

Note: First determine if the lease is an operating or finance lease applying the BOE sales and use tax rules. The lessor must pay the sales and use tax under an operating lease. Under a finance lease, either the lessor or the lessee can pay the tax. You may have to look to the financial statements to see if the taxpayer has lease commitments. If so, ask what assets are being leased.

 
69. In the case of an operating lease, was an election made by the lessor to pay the sales or use tax based on his or her acquisition price at the time the property was acquired, (i.e., up-front)?

In the case of a finance lease, was an election made by either the lessor or lessee to pay the sales or use tax based on the lessee's acquisition price of the property, (i.e., up-front)?

Note: Under either type of lease, if sales or use tax is not paid up-front, the lessee cannot claim the MIC on the item of property.

 
70. Did you review the invoice(s) for the purchase price, asset description, payment of sales or use tax, where shipped (should be California) and date purchased?

Note: The asset must be purchased and placed in service in California on or after 1/1/94 (the cut-off test). If assets purchased and placed in service prior to this date, the asset does not qualify for the MIC.