Under changes to “loss-trapping rules” (LTRs), introduced by Section 470 of the American Jobs Creation Act of 2004, tax-exempt hospitals could lose the fixed priced purchasing option for certain leasing arrangements or face an increase in rents of as much as 15 percent, according to estimates by some companies. The LTRs were enacted to eliminate perceived tax abuses associated with highly structured, much publicized lease-in/lease-out (LILO) and sale-in/sale-out (SILO) transactions. The LTRs mitigate the benefits of leasing to tax-exempt entities by limiting a lessor’s ability to use deductions associated with the ownership of equipment to the extent of the rental income generated in connection with the lease of the equipment. Significantly, however, Congress acknowledged the LTRs were not intended to “inhibit legitimate commercial leasing transactions that involve a significant and genuine transfer of the benefits and burdens of tax ownership between the taxpayer and the tax-exempt lessee."
For more information, see HFMA's issue brief "Loss Trapping Rules Affect Not-For-Profit Leasing Arrangements."
