Depreciation generally may be claimed by the owner of a capital asset. If you lease your equipment instead of purchasing it, you can't depreciate the equipment. However, you will generally be able to deduct the lease payments you make, at the time that you make them, which can result in a larger tax benefit than you'd get if you bought the equipment outright.

Warning In some cases, what appears to be a lease might be treated as a sale for tax purposes under IRS rules.

To make an informed decision about whether purchasing or leasing will be more advantageous in your particular situation, you need to become aware of the basic rules involved in leasing. For major equipment purchases, we recommend that you (or your accountant) should perform a cash flow analysis and comparison of what the payments and tax savings would be under a sale or a lease.

If you lease property that is used for both business and personal purposes, you must prorate the lease payments and deduct only the portion of the lease that corresponds to your business use percentage.

Inclusion amounts for listed property. If, instead of purchasing it, you lease your car, computer system, audio/visual equipment, or other listed property you may have to include an additional amount known as the "inclusion amount" in your gross income. This extra amount is intended to place you on the same financial footing as someone who has purchased similar equipment and can only deduct the depreciation, which is typically less than your lease payments would be.

If you lease a car, you must calculate an inclusion amount for every year you deduct lease payments.

If you lease some other type of listed property, you only need to calculate an inclusion amount if your business usage of the property drops to 50 percent or less for a year. The inclusion amount is added to your income only for that year.

This could easily happen, for instance if you have not claimed the home office deduction, but have been leasing a computer predominantly for business at home, and then you find that your family is using the computer more than you!

To calculate your inclusion amount for items other than cars, you need to know the fair market value of the item on the first day of the lease term. Alternately, if the capitalized cost of the item is specified in the lease, you must treat that amount as the "fair market value."

Then, you can follow the directions and use the tables in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, to calculate your inclusion amount. The final result must be included as "other income" on Line 6 of your Schedule C.

As we've said, inclusion amounts for listed property other than cars are included in gross income only in the first year that business use drops to 50 percent or less.

There is an exception to this rule if the lease term began within the last nine months of your tax year and extends into the next year, and you did not use the property more than 50 percent for business in the first year of the lease. In that case, you would calculate your average business use percentage for the first and second calendar years and the percentage amount for the first year. The inclusion amount would be added to your income for the second year, not the first.