Tax columnist: IRS may treat a farm equipment lease as a purchase when the terms get too aggressive

DTN tax columnist Rod Mauszycki, a tax principal at CLA in Minneapolis, wrote on October 2, 2026, that “many people are exploring leasing” with commodity prices low and interest rates high.

He described the ordinary operating lease as periodic payments plus the choice to buy the equipment when the term ends, at its residual or fair market value. If the terms become too aggressive, the IRS may reclassify the deal as a capital lease. The farmer is then treated as the owner and depreciates the equipment instead of deducting the payments as an expense.

He called the residual one area where lessors and lessees get tripped up. He said there is no clear guidance, but that the IRS likes to see a residual of at least 20%. That is a columnist’s analysis, not IRS guidance. What matters more, he wrote, is the economic substance of the deal, meaning whether the lessee is likely to buy at the end. The residual must be “high enough to make the lessee think twice about purchasing the equipment.”