The Metro Crash and Tax: Leaseback Infrequently Asked Questions

As discussed in an earlier post, Metro said that it could not comply with the NTSB recommendation that Metro replace its 1000-series Rohr cars because of a “tax advantage lease.” This post explains tax advantage leases in more detail–not the specifics of the WMATA’s Rohr leases, which we haven’t seen, but rather sale-leasebacks (sometimes called “sale-in/lease-outs,” or “SILOs”) in general.  We’ll talk about two parties: TransitCo, which, like WMATA, is a tax-exempt transit authority, and Taxpayer, which is not tax exempt and has a regular flow of income.  (This post discusses domestic sale-leasebacks; there are additional tweaks for cross-border sale-leasebacks.)
So: Leaseback Infrequently Asked Questions (or, Everything You Wanted To Know About Leasebacks but Were Afraid To Ask, Because You Thought You Would Probably Get Really Bored).

What’s the main idea?
The main idea is that TransitCo, which is tax exempt and thus cannot use tax benefits, essentially sells these tax benefits to Taxpayer, a taxable party who can use them to offset income.
What tax benefits?
TransitCo is mostly selling depreciation deductions.
That is not helpful.  What are depreciation deductions?
Let’s back up for a minute.  Imagine you spend $100 buying baking supplies, which you then turn into cupcakes that you sell for $110. It seems inaccurate to say that you have $110 of income when overall, you are only $10 better off than you would have been if you had not baked the cupcakes at all. So to determine taxable income, you get to subtract your trade or business expenses from your gross income. In this case, you would have only $10 of taxable income.


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