This table includes an
educational quick reference accounting guide to help properly classify leases,
from the standpoint of both Lessee, and Lessor. The vertical columns are
divided into two main categories: Accounting Books (for financial reporting to
investors), and Tax Books (when completing your tax return). These two main
columns are further divided into two subcategories. For Accounting Books, these
subcategories are Capital Leases and Operating Leases. The synonymous
categories for tax purposes are Finance Leases and True Leases. Often, people
confuse the two categories and subcategories and use the category naming
incorrectly. The purpose of this comparison table is to elucidate to the reader
the subtle differences in the rules used to categorize each type. The subtle
differences lead one to believe that they can be discussed interchangeably.
Remember, many companies maintain two separate books: one for financial
reporting to investors, and the other to the Internal Revenue Service.
| |
|
Accounting Books |
Tax |
| |
Controlling Entity |
SFAS13 |
Revenue Ruling 55-540 and 2001-28 |
| |
Category |
Capital Lease |
Operating Lease |
Finance Lease |
True Lease |
|
|
Subcategories |
Direct Finance Lease, Sales Type Lease |
Leveraged Lease |
Full payout lease, Money-over-money, Conditional sale |
Tax Lease |
|
|
End-of-Lease Possibles if the lease passes the tests below |
$1 buyout |
FMV purchase |
$1 buyout |
FMV purchase |
|
|
Any fixed price purchase (PUT) |
|
Any fixed price purchase (PUT) |
FMV or Greater than
10% option to
purchase* |
|
|
Test |
Only needs to pass one of these tests |
Must pass all tests |
Only needs to pass one of these tests |
Must pass all tests |
|
1 |
Residual at-risk investment required by Lessor |
Present Value of lease payments Greater
than 90% of purchase
price |
Present Value of lease payments Less
than 90% of
purchase price |
Less than 1 year or 20%
remaining useful life* |
Greater than 1 year or
20% remaining useful life* |
|
2 |
How long is the lease term? |
Greater than 75% of
equipment useful life ** |
Less than 75% of
equipment useful life ** |
Greater than 80% of the equipment useful life* |
Less than 80% of the equipment useful life* |
|
3 |
Auto transfer of title |
YES |
Not allowed |
YES* |
Not allowed* |
|
4 |
Bargain Purchase Option |
YES |
Not allowed |
YES* |
Not allowed* |
|
|
* Common practice only, This is NOT tax law. Use it as guidance only |
|
|
|
** Generally not applicable for most equipment leases |
|
|
Further Informational Questions (not relating to the Accounting Tests) |
|
a |
How is the asset reported on the Balance Sheet? |
Lessee: depreciable asset. |
Lessee: not reported |
NA |
NA |
|
Lessor: as a receivable (all payments less unearned
income) |
Lessor: depreciable asset |
NA |
NA |
|
c |
Who depreciates (amortizes) the equipment? |
Lessee |
Lessor |
Lessee |
Lessor |
|
d |
How is the Pofit/Loss recorded by the Lessee? |
Interest expense from amort. sched. + Straight Line (SL) depreciation |
Rental payment expense |
Interest expense from amort. sched. + MACRS depreciation |
Rental payment expense |
|
e |
How is the Profit/Loss recorded by the Lessor? |
Lease (Interest) income from amort. Schedule |
Rental payment - SL depreciation |
Lease (Interest) income from amort. Schedule |
Rental payment income - MACRS depreciation |
|
f |
Who preferes each of the classifications? |
Lessor |
Lessee |
Neither |
Lessor and Lessee |
