It is an established concept that you can use your expenses to lower your gross income, from which your taxes would be imposed. In effect, you have less taxes to pay, provided that you comply with the requirements to make your expenses deductible.

Typically, all expenses that a business incurs to purchase everyday items it needs are business expenses. You can use these outright as a deductible expense as long as you have the receipts to back these up.

However, if you purchase something that will benefit your business for longer than a year (let’s say a car, or equipment like a stove), the payments you used to buy thees will not be deductible expenses in the year you bough these. Instead, you have to spread out the value of the object per year and deduct the value as the year comes. This is the concept of Depreciation.

If you have a lease to own agreement, are you already buying the vehicle?

In a rent-to-own scheme, you have to consider whether you are already the owner of the vehicle during the period of the lease or not.

If the lessor of the vehicle remains to be the owner during the lease period, the lease is called a Financial Lease.

In the case of Beltran vs. PAIC Finance, GR Nos. 83113, 83256 dated 19 May 1229, the court held that the purpose of a financial lease transaction is to allow a prospective buyer of equipment to lease it in the meantime since he is unable to pay its entire value. Here, the purchaser pays a rental fee to amortize at least 70% of the acquisition cost (value of the vehicle and profit of the lessor) with the expectation that at the end of the lease period, the buyer will be the owner.

As such, the lessor retains legal ownership over the vehicle to ensure that he gets a return of the money he used to purchase it, plus any other charges and profit, through a prospective buyer’s rental payments.

On the other hand, if the rent-to-own arrangement is, in fact, a conditional sale, your payments are no longer considered rental fees but installments.

Article 1458 of the Civil Code provides that a transaction is a conditional sale if the lessor stipulates in the contract of sale that he will transfer the ownership of the vehicle to you for a consideration subject to a condition.

Note that the contract does not need to be titled, contract of conditional sale, to be considered as such. Even an agreement denominated as a lease may be considered as a conditional sale provided the any of the conditions under Revenue Regulation (RR) No. 19-86 are present, to wit:

1. You, as lessee, have the option to purchase the asset at any time during lease (and not just at the end of the lease);
2. You are automatically the owner after rentals are paid;
3. Your lessor credits your rental payments against the purchase price of the asset;
4. Receipts must show if payments are made partially or in full.

If it is a conditional sale under RR No. 19-86, your payments shall be treated as capital expenses to be depreciated over the years. You still need to comply with substantial requirements or requirements of proof under the law. For sale of vehicles, Section 3, RR No. 12-2012 provides that you must make sure that you receive official receipts or other adequate records showing your payments. Further, these ORs or other records must contain the following information, to wit:

1. Registration identification number of the vehicle;
2. Total price of the vehicle; and
3. Direct relation of the vehicle to the development, management, operation and/or conduct of trade or business.

If the conditional sale does not have a stipulation as to interests and other charges, the entire amount you pay are deductions by depreciation. On the other hand, if the sale has a stipulation for interests and other charges, your payments for the vehicle shall be a capital expense, and those payments for interest and other charges will be considered as business expenses.