One of the problems facing small business owners is disguised purchase payments. This happens often when a business leases a copier (for example) for 60 months and then has an option to own the equipment after the lease term expires. A true lease payment is deductible in full each month, but an installment purchase payment is only deducted to the amount of finance or interest charges.
Here is the blurb from IRS Publication 535-
Lease or purchase. There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. You must first determine whether your agreement is a lease or a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense.
Conditional sales contract. Whether an agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. No single test, or special combination of tests, always applies.
However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true.
There’s no real value added by exploding all these factors into drawn out explanations. The most common lease problem is the $1 buyout or something similar- be careful what you are getting into with leases that might be disguised as purchases. Not a huge deal, but the accounting and subsequent business deduction will be different.
In the accounting world we call this example a capital lease (as opposed to an operating lease). Here are some more signs of a capital lease to noodle on-
Note all the “or’s”. Again, don’t get too caught up in the technicalities. Just understand that you might have a capital lease that needs further investigation and special handling for your accounting records. Operating leases are simple, and deducted in their entirety (such as office rent). Here is the link to the IRS Publication 535 (Business Expenses)-
Taxpayer's Comprehensive Guide to LLCs and S Corps : 2019 Edition