BNA INSIGHTS: Tax-Based Leasing, Tax Credits, and Economic Substance

Leasing has traditionally been a way for developers and other users of equipment to indirectly access tax credits and other government incentives for capital investment (such as accelerated depreciation) when they did not otherwise have the tax capacity to benefit from such incentives on a current basis.

In a leveraged lease or other tax-based lease financing, an investor with adequate tax capacity purchases the capital asset and leases it to the developer or other end user at rents that reflect, in part, the tax benefits available to the lessor. Thus, the developer or other end user (in the role of the lessee) receives, indirectly, at least part of the benefit of tax incentives.