Illinois law has changed so that sales tax applies to the down payment and monthly lease payments.
If the down payment is $2,000, the tax on that would be $165
If the monthly payment is $300, the sales tax would be $24.75 each month
The total tax for a 36-month lease would be $1,056, or $1,419 less than under the current formula
What They Gave You Before is Now Taken Back
Another new wrinkle in Illinois for 2015 is that trading in a vehicle will no longer affect the sales tax on a lease
Currently, because a trade-in lowers the capitalized cost, it also reduces the applicable sales tax
That provision ends with the new law because the cap cost is no longer taxed
Comparison to Other States
With the changes in Illinois, Texas will be the only state that still taxes the capitalized cost of a leased vehicle In other states, generally only the monthly lease payments are taxed, similar to the new law in Illinois
Types of Lease Plans
Two general types of lease plans are available. The major factor that distinguishes these plans is how they are treated for tax purposes
Operating Lease
Calls for a series of regular payments, usually annual or semi-annual, for a period of years
At the end of the lease period, you may:
Purchase the machine at fair market value
Return the machine
Extend the lease
The lease payments are reported as ordinary expenses on your tax return
If the purchase option is exercised: The machine is placed on your depreciation schedule with a beginning basis equal to the used purchase price
Finance Lease
Treated as a conditional sales contract by the IRS
You are considered the owner of the machine, and it is placed on your depreciation schedule
Payments must be divided into interest and principal, with interest being tax deductible
Many finance leases are essentially installment loans with balloon payments after three to five years
At the end of the lease, you can:
Return the machine (give up ownership)
Make the balloon payment (take ownership)
Since it is not taxed as a true lease, the final buy-out price (balloon payment) can vary significantly
Advantages of Leasing
Although leasing may not be for everyone, there are several advantages:
Lower payments compared to most conventional loans
Utilizes operating capital instead of investment capital
Payment schedules can match periods of high cash flow
Cash requirements are constant and known in advance
Beneficial for high volume, low equity operators
Useful if you routinely trade machinery every few years
Ideal if you’re near retirement and want to avoid income tax recapture
Allows you to try out a machine for a few years without buying it
Expense Method Depreciation
You may be eligible for expense method depreciation during the first year:
Available for machinery purchased or leased under a finance lease
Not available under an operating lease
If you buy other property that can also utilize the expense method depreciation, you may have already reached your limit for the year
Include on the Balance Sheet
While leasing is sometimes referred to as “off balance sheet financing”:
An operating lease is not a loan, but it does represent an obligation to pay
The Farm Financial Standards Council recommends:
Do not show leases of capital assets as a liability
Do not show leased equipment as an asset
Add a footnote to the balance sheet explaining lease terms
Frequently Asked Questions
How does the new Illinois sales tax law affect my lease payments?
Under the new law, Illinois now taxes both the down payment and the monthly lease payments rather than the full capitalized cost. For example, if your down payment is $2,000, you’ll pay $165 in tax upfront, and if your monthly lease is $300, you’ll owe $24.75 in tax each month.
Will I still get a sales tax benefit from trading in my old vehicle?
No. Starting in 2015, Illinois no longer provides a tax credit for trade-ins on leased vehicles. Since the capitalized cost is not taxed under the new law, the trade-in value no longer reduces your taxable amount.
How does Illinois compare to other states in taxing lease vehicles?
With these changes, Illinois aligns with most states that only tax monthly lease payments. Texas remains one of the few that still taxes the full capitalized cost of the lease up front.
What is the difference between an operating lease and a finance lease?
An operating lease is treated as a rental agreement with tax-deductible lease payments. A finance lease is considered a purchase under IRS rules, meaning you can claim depreciation, and payments must be split into principal and interest for tax purposes.
Can I claim depreciation on leased equipment?
You can claim depreciation only if you use a finance lease. Operating leases do not qualify for depreciation, but finance leases may also make you eligible for expense method depreciation in the first year—subject to annual limits and your other purchases.
