A manufacturing client entered into a capital lease for some of its equipment as a means of financing. Since the equipment was already owned by the client, the accounting team asked Machen McChesney to review the transactions and confirm the proper accounting treatment of the lease liability and subsequent repayments. While reviewing the leases, Machen McChesney noticed that the leasing company was charging tax on the payment invoices each month. Because the client had already paid use tax on the original purchase of the equipment, and because the lease met the definition of a capital lease and the title reverted back to the client at the end of the lease term, the tax should not have been charged by the leasing company.
Machen McChesney notified the client that the tax should not be paid, contacted the leasing company and brought the error to their attention.
The leasing company corrected the error, and credited the client for taxes paid in error. Future taxes were removed from the invoices. Machen McChesney also worked with the local authorities to help the leasing company recover taxes remitted in error.
Over the 60-month lease term, this resulted in approximately $514,000 of tax savings to the client.
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