Leasing is a very lucrative source of financing for certain companies needs, including corporations and small- to medium-sized businesses. This is because the Internal Revenue Service (IRS) allows the lessee to deduct the lease payments and the lessor can deduct interest payments on any debt used to finance the asset leased.

A lease in which the lessee is the effective owner of the leased property, can depreciate the asset under lease for tax purposes and can deduct only the interest portion of the lease payment is called a nontax-oriented lease .

Rihana is a lawyer at Leaseonic Corp. She is evaluating the companys current lease agreements. Rihana recently hired an intern, Michael, and assigned him the task of listing the provisions for tax guidelines related to lease contracts. Rihana needs to check and find mistakes in the provisions that Michael listed.

Of the following points outlined in Michaels document, which are correct? Check all that apply.

A) The IRS puts restrictions on lease terms so that the lease transaction can allow companies to increase rapid payments that are tax deductible.

B) The residual value of an equipment after expiration of the lease should be at least 20% without adjusting for inflation.

C) The lessee or any other party has the right to purchase the equipment at the expiration at a predetermined fixed price specified in the lease contract.

D) The lessee has the option of buying the equipment at the expiration of the lease contract at its fair market value.

E) Equipment with a 20-year life cannot be leased for more than 16 years.

Under the Income Tax Act, when a purchase option is exercised, the amount deemed to have been claimed by the lessee as CCA is based on the following:

A) the fair market value of the asset at the time of purchase.

B) the option purchase price plus all lease payments paid under the agreement.

C) the difference between the purchase price and CRAs deemed cost.