Is my equipment lease just a monthly rent expense, or is it really a purchase I need to put on the balance sheet?

First test: is it a rental, or a purchase spread over time?

A taxpayer who acquires equipment for use in a trade or business must first determine whether the agreement is a lease or a conditional sales contract. (jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)

“You must first determine whether your agreement is a lease or a conditional sales contract.”

Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, read in light of the facts and circumstances existing when the agreement was entered into. (jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)

“Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, which is read in light of the facts and circumstances when it was entered into.”

A contract is or contains a lease if it conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration, and that period of time may be described in terms of the amount of use of the identified asset. (jurisdiction: United States, entity_scope: Entities applying Topic 842 to contracts involving property, plant or equipment, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-15-3 A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. A period of time may be described in terms of the amount of use of an identified asset (for example, the number of production units that an item of equipment will be used to produce).”

One of the finance-lease/sales-type classification criteria is that the lease transfers ownership of the underlying asset to the lessee by the end of the lease term. (jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.”

One of the finance-lease/sales-type classification criteria is that the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. (jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.”

One of the finance-lease/sales-type classification criteria is that the lease term is for the major part of the remaining economic life of the underlying asset; however, where the commencement date falls at or near the end of the underlying asset's economic life this criterion must not be used for classifying the lease. (jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.”

One of the finance-lease/sales-type classification criteria is that the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. (jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset.”

One of the finance-lease/sales-type classification criteria is that the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. (jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.”

When none of the criteria in paragraph 842-10-25-2 are met, a lessee must classify the lease as an operating lease. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-25-3 When none of the criteria in paragraph 842-10-25-2 are met: a. b. A lessee shall classify the lease as an operating lease.”

The Update describes one reasonable approach to assessing the economic-life and present-value criteria, under which seventy-five percent or more of the remaining economic life would be a major part of that life, a commencement date within the last 25 percent of total economic life would be at or near the end of economic life, and ninety percent or more of fair value would amount to substantially all of fair value; it is presented as one reasonable approach rather than as a required bright line. (jurisdiction: United States, entity_scope: Entities applying the classification criteria in Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-55-2 When determining lease classification, one reasonable approach to assessing the criteria in paragraphs 842-10-25-2(c) through (d) and 842-10-253(b)(1) would be to conclude: a. b. c. Seventy-five percent or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset. A commencement date that falls at or near the end of the economic life of the underlying asset refers to a commencement date that falls within the last 25 percent of the total economic life of the underlying asset. Ninety percent or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset.”

The transfer-of-ownership criterion is met in leases that provide that, upon the lessee's performance in accordance with the lease terms, the lessor should execute and deliver to the lessee such documents (including, if applicable, a bill of sale) as may be required to release the underlying asset from the lease and transfer ownership to the lessee. (jurisdiction: United States, entity_scope: Entities applying the classification criteria in Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-55-4 The criterion in paragraph 842-10-25-2(a) is met in leases that provide, upon the lessee’s performance in accordance with the terms of the lease, that the lessor should execute and deliver to the lessee such documents (including, if applicable, a bill of sale) as may be required to release the underlying asset from the lease and to transfer ownership to the lessee.”

A lease provision under which ownership of the underlying asset is not transferred if the lessee elects not to pay a specified fee (whether nominal or otherwise) to complete the transfer is an option to purchase the underlying asset and does not satisfy the transfer-of-ownership criterion. (jurisdiction: United States, entity_scope: Entities applying the classification criteria in Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-55-6 A provision in a lease that ownership of the underlying asset is not transferred to the lessee if the lessee elects not to pay the specified fee (whether nominal or otherwise) to complete the transfer is an option to purchase the underlying asset. Such a provision does not satisfy the transfer-of-ownership criterion in paragraph 842-10-25-2(a).”

An entity must determine the lease term as the noncancellable period of the lease together with periods covered by a lessee extension option the lessee is reasonably certain to exercise, periods covered by a termination option the lessee is reasonably certain not to exercise, and periods covered by an option to extend or not to terminate whose exercise is controlled by the lessor. (jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-30-1 An entity shall determine the lease term as the noncancellable period of the lease, together with all of the following: a. b. c. Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.”

At the commencement date an entity assesses whether the lessee is reasonably certain to exercise or not exercise an option by considering all relevant economic factors (contract-based, asset-based, market-based and entity-based), which are interrelated and often require combined consideration; the paragraph gives a non-exhaustive list of example factors including the contractual terms for optional periods compared with current market rates, significant leasehold improvements expected to have significant economic value when the option becomes exercisable, costs of terminating the lease and signing a new one, and the importance of the underlying asset to the lessee's operations. (jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-55-26 At the commencement date, an entity assesses whether the lessee is reasonably certain to exercise or not to exercise an option by considering all economic factors relevant to that assessment—contract-based, asset-based, market-based, and entity-based factors. An entity’s assessment often will require the consideration of a combination of those factors because they are interrelated. Examples of economic factors to consider include, but are not limited to, any of the following: a. b. c. d. Contractual terms and conditions for the optional periods compared with current market rates, such as: 1. The amount of lease payments in any optional period 2. The amount of any variable lease payments or other contingent payments, such as payments under termination penalties and residual value guarantees 3. The terms and conditions of any options that are exercisable after initial optional periods (for example, the terms and conditions of a purchase option that is exercisable at the end of an extension period at a rate that is currently below market rates). Significant leasehold improvements that are expected to have significant economic value for the lessee when the option to extend or terminate the lease or to purchase the underlying asset becomes exercisable. Costs relating to the termination of the lease and the signing of a new lease, such as negotiation costs, relocation costs, costs of identifying another underlying asset suitable for the lessee’s operations, or costs associated with returning the underlying asset in a contractually specified condition or to a contractually specified location. The importance of that underlying asset to the lessee’s operations, considering, for example, whether the underlying asset is a specialized asset and the location of the underlying asset.”

The taxpayer's getting title to the property upon payment of a stated amount of "rental" payments required under the agreement is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease. (jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)

“You get title to the property upon the payment of a stated amount of "rental" payments required under the agreement.”

Having an option to buy the property at a nominal price compared to the value of the property at the time the option may be exercised — that value being determined when the agreement is entered into — is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease. (jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)

“You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.”

Partly established. Established: the criteria that determine whether an equipment or vehicle arrangement is a rental or an acquisition financed over time (S02). Missing: what in an agreement evidences each criterion; that the classification rests on the substance of those terms rather than on the label the agreement or the vendor applies to the arrangement.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

The terms decide it, not the word on the agreement

See A taxpayer who acquires equipment for use in a trade or business must first determine whether the agreement is a lease or a conditional sales contract.

See Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, read in light of the facts and circumstances existing when the agreement was entered into.

See A lease provision under which ownership of the underlying asset is not transferred if the lessee elects not to pay a specified fee (whether nominal or otherwise) to complete the transfer is an option to purchase the underlying asset and does not satisfy the transfer-of-ownership criterion.

Lease payments include in-substance fixed payments, which are payments that may in form appear to contain variability but are in effect unavoidable; the examples given, which are not exhaustive, include payments that do not create genuine variability, such as those resulting from clauses with no economic substance, and the lower of alternative sets of payments where the lessee must make at least one set. (jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-55-31 Lease payments include in substance fixed lease payments. In substance fixed payments are payments that may, in form, appear to contain variability but are, in effect, unavoidable. In substance fixed payments for a lessee or a lessor may include, for example, any of the following: a. Payments that do not create genuine variability (such as those that result from clauses that do not have economic substance) 45 b. The lower of the payments to be made when a lessee has a choice about which set of payments it makes, although it must make at least one set of payments.”

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government.

The criteria that decide it, and what in the agreement shows each one

See A contract is or contains a lease if it conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration, and that period of time may be described in terms of the amount of use of the identified asset.

See One of the finance-lease/sales-type classification criteria is that the lease transfers ownership of the underlying asset to the lessee by the end of the lease term.

See One of the finance-lease/sales-type classification criteria is that the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

See One of the finance-lease/sales-type classification criteria is that the lease term is for the major part of the remaining economic life of the underlying asset; however, where the commencement date falls at or near the end of the underlying asset's economic life this criterion must not be used for classifying the lease.

See One of the finance-lease/sales-type classification criteria is that the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.

See One of the finance-lease/sales-type classification criteria is that the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

See When none of the criteria in paragraph 842-10-25-2 are met, a lessee must classify the lease as an operating lease.

See The Update describes one reasonable approach to assessing the economic-life and present-value criteria, under which seventy-five percent or more of the remaining economic life would be a major part of that life, a commencement date within the last 25 percent of total economic life would be at or near the end of economic life, and ninety percent or more of fair value would amount to substantially all of fair value; it is presented as one reasonable approach rather than as a required bright line.

See The transfer-of-ownership criterion is met in leases that provide that, upon the lessee's performance in accordance with the lease terms, the lessor should execute and deliver to the lessee such documents (including, if applicable, a bill of sale) as may be required to release the underlying asset from the lease and transfer ownership to the lessee.

See A lease provision under which ownership of the underlying asset is not transferred if the lessee elects not to pay a specified fee (whether nominal or otherwise) to complete the transfer is an option to purchase the underlying asset and does not satisfy the transfer-of-ownership criterion.

See An entity must determine the lease term as the noncancellable period of the lease together with periods covered by a lessee extension option the lessee is reasonably certain to exercise, periods covered by a termination option the lessee is reasonably certain not to exercise, and periods covered by an option to extend or not to terminate whose exercise is controlled by the lessor.

See At the commencement date an entity assesses whether the lessee is reasonably certain to exercise or not exercise an option by considering all relevant economic factors (contract-based, asset-based, market-based and entity-based), which are interrelated and often require combined consideration; the paragraph gives a non-exhaustive list of example factors including the contractual terms for optional periods compared with current market rates, significant leasehold improvements expected to have significant economic value when the option becomes exercisable, costs of terminating the lease and signing a new one, and the importance of the underlying asset to the lessee's operations.

See The taxpayer's getting title to the property upon payment of a stated amount of "rental" payments required under the agreement is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease.

See Having an option to buy the property at a nominal price compared to the value of the property at the time the option may be exercised — that value being determined when the agreement is entered into — is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease.

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.

Which rulebook you are on, and whether it goes on your balance sheet

The FASB Accounting Standards Codification is stated to be the source of authoritative generally accepted accounting principles (GAAP) recognised by the FASB for application by nongovernmental entities. (jurisdiction: United States, entity_scope: Nongovernmental entities applying US GAAP, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02))

“The FASB Accounting Standards Codification® is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.”

Topic 842 affects any entity that enters into a lease as defined in the Update, subject to some specified scope exemptions, and the Update's guidance supersedes Topic 840, Leases. (jurisdiction: United States, entity_scope: Any entity that enters into a lease, subject to specified scope exemptions, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02))

“Topic 842 affects any entity that enters into a lease (as that term is defined in this Update), with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases.”

Topic 842 becomes effective for private companies and not-for-profit organizations that are not conduit bond obligors for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. (jurisdiction: United States, entity_scope: Private companies and not-for-profit organizations that are not conduit bond obligors, accounting_basis: U.S. GAAP (FASB Accounting Standards Codification), effective_from: Fiscal years beginning after December 15, 2021 (interim periods within fiscal years beginning after December 15, 2022))

“Topic 842 becomes effective for private companies and not-for-profit organizations that are not conduit bond obligors for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.”

As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-25-2 As an accounting policy, a lessee may elect not to apply the recognition requirements in this Subtopic to short-term leases. Instead, a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred (consistent with paragraphs 842-20-55-1 through 55-2). The accounting policy election for short-term leases shall be made by class of underlying asset to which the right of use relates.”

A short-term lease is defined as a lease that at the commencement date has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“Short-Term Lease A lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.”

As amended, paragraph 842-20-30-3 permits a lessee that is not a public business entity to use a risk-free discount rate for the lease instead of its incremental borrowing rate, determined using a period comparable with that of the lease term, as an accounting policy election made by class of underlying asset. (jurisdiction: United States, entity_scope: Lessees that are not public business entities, accounting_basis: U.S. GAAP (FASB Accounting Standards Codification), conditions: The risk-free rate is determined using a period comparable with that of the lease term; The election is an accounting policy election made by class of underlying asset)

“A lessee that is not a public business entity is permitted to use a risk-free discount rate for the lease instead of its incremental borrowing rate, determined using a period comparable with that of the lease term, as an accounting policy election made by class of underlying asset for all leases.”

A lessee that accounts for short-term leases under paragraph 842-20-25-2 must disclose that fact, and if the period's short-term lease expense does not reasonably reflect its short-term lease commitments, must disclose that fact and the amount of those commitments. (jurisdiction: United States, entity_scope: Lessees electing the short-term lease exemption under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-50-8 A lessee that accounts for short-term leases in accordance with paragraph 842-20-25-2 shall disclose that fact. If the short-term lease expense for the period does not reasonably reflect the lessee’s short-term lease commitments, a lessee shall disclose that fact and the amount of its short-term lease commitments.”

Partly established. Established: which reporting framework applies to a small US private business for arrangements of this kind (S19, S20). Missing: whether balance-sheet recognition is required; what relief or exemption is available.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Your reporting framework, balance-sheet recognition, and the relief for a small private business

See The FASB Accounting Standards Codification is stated to be the source of authoritative generally accepted accounting principles (GAAP) recognised by the FASB for application by nongovernmental entities.

See Topic 842 affects any entity that enters into a lease as defined in the Update, subject to some specified scope exemptions, and the Update's guidance supersedes Topic 840, Leases.

See Topic 842 becomes effective for private companies and not-for-profit organizations that are not conduit bond obligors for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022.

See As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates.

See A short-term lease is defined as a lease that at the commencement date has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

See As amended, paragraph 842-20-30-3 permits a lessee that is not a public business entity to use a risk-free discount rate for the lease instead of its incremental borrowing rate, determined using a period comparable with that of the lease term, as an accounting policy election made by class of underlying asset.

See A lessee that accounts for short-term leases under paragraph 842-20-25-2 must disclose that fact, and if the period's short-term lease expense does not reasonably reflect its short-term lease commitments, must disclose that fact and the amount of those commitments.

Partly established. Established: which reporting framework applies to the reader's business (S19, S20); whether any relief or exemption is available to a smaller private business (S22, S24, S29). Missing: whether it requires arrangements of this kind to be recognised on the balance sheet.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

What each treatment puts in your books

See Lease payments include in-substance fixed payments, which are payments that may in form appear to contain variability but are in effect unavoidable; the examples given, which are not exhaustive, include payments that do not create genuine variability, such as those resulting from clauses with no economic substance, and the lower of alternative sets of payments where the lessee must make at least one set.

See As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates.

At the commencement date a lessee must measure the lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement, and must measure the right-of-use asset as described in paragraph 842-20-30-5. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-30-1 At the commencement date, a lessee shall measure both of the following: a. b. The lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement (as described in paragraphs 842-20-30-2 through 30-4) The right-of-use asset as described in paragraph 842-20-30-5.”

At the commencement date the cost of the right-of-use asset must consist of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date less any lease incentives received, and any initial direct costs incurred by the lessee. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-30-5 At the commencement date, the cost of the right-of-use asset shall consist of all of the following: a. b. c. The amount of the initial measurement of the lease liability Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received Any initial direct costs incurred by the lessee (as described in paragraphs 842-10-30-9 through 30-10).”

At the commencement date the lease payments must consist of the listed payments relating to use of the underlying asset during the lease term, including fixed payments (including in-substance fixed payments) less lease incentives, index- or rate-linked variable payments measured using the index or rate at commencement, the exercise price of a purchase option the lessee is reasonably certain to exercise, termination penalties where the lease term reflects exercise of a termination option, certain special-purpose-entity structuring fees, and for a lessee amounts probable of being owed under residual value guarantees. (jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-30-5 At the commencement date, the lease payments shall consist of the following payments relating to the use of the underlying asset during the lease term: a. b. c. d. e. f. Fixed payments, including in substance fixed payments, less any lease incentives paid or payable to the lessee (see paragraphs 842-10-55-30 through 55-31). Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option (assessed considering the factors in paragraph 842-10-55-26). Payments for penalties for terminating the lease if the lease term (as determined in accordance with paragraph 842-10-30-1) reflects the lessee exercising an option to terminate the lease. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction. However, such fees shall not be included in the fair value of the underlying asset for purposes of applying paragraph 842-10-25-2(d). For a lessee only, amounts probable of being owed by the lessee under residual value guarantees (see paragraphs 842-10-55-34 through 5536).”

A lessee should use the rate implicit in the lease whenever that rate is readily determinable and otherwise uses its incremental borrowing rate; a lessee that is not a public business entity is permitted, as an accounting policy election for all leases, to use a risk-free discount rate determined using a period comparable with the lease term. (jurisdiction: United States, entity_scope: Lessees applying Topic 842; the risk-free-rate election is available only to lessees that are not public business entities, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-30-3 A lessee should use the rate implicit in the lease whenever that rate is readily determinable. If the rate implicit in the lease is not readily determinable, a lessee uses its incremental borrowing rate. A lessee that is not a public business entity is permitted to use a risk-free discount rate for the lease, determined using a period comparable with that of the lease term, as an accounting policy election for all leases.”

For a finance lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) amortisation of the right-of-use asset and interest on the lease liability, variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset. (jurisdiction: United States, entity_scope: Lessees with finance leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-25-5 After the commencement date, a lessee shall recognize in profit or loss, unless the costs are included in the carrying amount of another asset in accordance with other Topics: a. b. c. Amortization of the right-of-use asset and interest on the lease liability Variable lease payments not included in the lease liability in the period in which the obligation for those payments is incurred (see paragraphs 842-20-55-1 through 55-2) Any impairment of the right-of-use asset determined in accordance with paragraph 842-20-35-9.”

For an operating lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis unless another systematic and rational basis is more representative (or the right-of-use asset has been impaired), variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset. (jurisdiction: United States, entity_scope: Lessees with operating leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-25-6 After the commencement date, a lessee shall recognize all of the following in profit or loss, unless the costs are included in the carrying amount of another asset in accordance with other Topics: a. b. c. A single lease cost, calculated so that the remaining cost of the lease (as described in paragraph 842-20-25-8) is allocated over the remaining lease term on a straight-line basis unless another systematic and rational basis is more representative of the pattern in which benefit is expected to be derived from the right to use the underlying asset (see paragraph 842-20-55-3), unless the right-of-use asset has been impaired in accordance with paragraph 842-20-35-9, in which case the single lease cost is calculated in accordance with paragraph 842-20-25-7 Variable lease payments not included in the lease liability in the period in which the obligation for those payments is incurred (see paragraphs 842-20-55-1 through 55-2) Any impairment of the right-of-use asset determined in accordance with paragraph 842-20-35-9.”

After the commencement date, for a finance lease a lessee must measure the lease liability by increasing its carrying amount to reflect interest and reducing it to reflect lease payments made, determining interest in each period as the amount producing a constant periodic discount rate on the remaining balance, and must measure the right-of-use asset at cost less accumulated amortisation and accumulated impairment losses. (jurisdiction: United States, entity_scope: Lessees with finance leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-35-1 After the commencement date, for a finance lease, a lessee shall measure both of the following: a. b. The lease liability by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect the lease payments made during the period. The lessee shall determine the interest on the lease liability in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the liability, taking into consideration the reassessment requirements in paragraphs 842-10-35-1 through 35-5. The right-of-use asset at cost less any accumulated amortization and any accumulated impairment losses, taking into consideration the reassessment requirements in paragraphs 842-10-35-1 through 35-5.”

After the commencement date, for an operating lease a lessee must measure the lease liability at the present value of the lease payments not yet paid discounted using the discount rate established at commencement (unless updated under paragraph 842-20-35-5) and must measure the right-of-use asset at the amount of the lease liability adjusted for prepaid or accrued lease payments, the remaining balance of lease incentives received, unamortised initial direct costs and impairment, unless the right-of-use asset has previously been impaired. (jurisdiction: United States, entity_scope: Lessees with operating leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-35-3 After the commencement date, for an operating lease, a lessee shall measure both of the following: a. b. The lease liability at the present value of the lease payments not yet paid discounted using the discount rate for the lease established at the commencement date (unless the rate has been updated after the commencement date in accordance with paragraph 842-20-35-5, in which case that updated rate shall be used) The right-of-use asset at the amount of the lease liability, adjusted for the following, unless the right-of-use asset has been previously impaired, in which case the right-of-use asset is measured in accordance with paragraph 842-20-35-10 after the impairment: 1. Prepaid or accrued lease payments 2. The remaining balance of any lease incentives received, which is the amount of the gross lease incentives received net of amounts recognized previously as part of the single lease cost described in paragraph 842-20-25-6(a) 3. Unamortized initial direct costs 4. Impairment of the right-of-use asset.”

A lessee must either present in the statement of financial position or disclose in the notes finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets, and finance lease liabilities and operating lease liabilities separately from each other and from other liabilities; right-of-use assets and lease liabilities are subject to the same current/noncurrent classification considerations as other nonfinancial assets and financial liabilities. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-45-1 A lessee shall either present in the statement of financial position or disclose in the notes all of the following: a. b. Finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets Finance lease liabilities and operating lease liabilities separately from each other and from other liabilities. Right-of-use assets and lease liabilities shall be subject to the same considerations as other nonfinancial assets and financial liabilities in classifying them as current and noncurrent in classified statements of financial position.”

In the statement of comprehensive income a lessee must present, for finance leases, interest expense on the lease liability and amortisation of the right-of-use asset (which are not required to be presented as separate line items and must be presented consistently with how the entity presents other interest expense and depreciation or amortisation of similar assets) and, for operating leases, lease expense included in income from continuing operations. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-45-4 In the statement of comprehensive income, a lessee shall present both of the following: a. b. For finance leases, the interest expense on the lease liability and amortization of the right-of-use asset are not required to be presented as separate line items and shall be presented in a manner consistent with how the entity presents other interest expense and depreciation or amortization of similar assets, respectively For operating leases, lease expense shall be included in the lessee’s income from continuing operations.”

When creating the account, the user is told to select the Other Current Liabilities account type if the loan is to be paid in full within one year, and Long Term Liabilities if it is to be repaid in more than one year. (jurisdiction: United States (QuickBooks Online United States edition; article served on the en-US QuickBooks support site), entity_scope: Businesses using QuickBooks Online that take a loan to purchase an asset, platform: QuickBooks Online, platform_edition: QuickBooks Online Advanced; QuickBooks Online Plus; QuickBooks Online Simple Start; QuickBooks Online Essentials; QuickBooks Ledger; Intuit Enterprise Suite; article updated 8/5/2026, conditions: Choice depends on the loan's repayment period: within one year vs. more than one year)

“Select Other Current Liabilities if to be paid in full within one year. Select Long Term Liabilities if to be repaid in more than one year”

The entry increases (credits) the loan/liability account and increases (debits) the corresponding asset account, by the amount of the loan. (jurisdiction: United States (QuickBooks Online United States edition; article served on the en-US QuickBooks support site), entity_scope: Businesses using QuickBooks Online that take a loan to purchase an asset, platform: QuickBooks Online, platform_edition: QuickBooks Online Advanced; QuickBooks Online Plus; QuickBooks Online Simple Start; QuickBooks Online Essentials; QuickBooks Ledger; Intuit Enterprise Suite; article updated 8/5/2026)

“We increase or credit the loan/liability account and increase or debit the right asset account.”

A lessee must disclose information about the nature of its leases, including a general description of them, the basis and terms and conditions on which variable lease payments are determined, the existence and terms and conditions of options to extend or terminate the lease, the existence and terms and conditions of lessee-provided residual value guarantees, and restrictions or covenants imposed by leases. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-50-3 A lessee shall disclose all of the following: a. Information about the nature of its leases, including: 1. A general description of those leases. 2. The basis and terms and conditions on which variable lease payments are determined. 3. The existence and terms and conditions of options to extend or terminate the lease. A lessee should provide narrative disclosure about the options that are recognized as part of its right-of-use assets and lease liabilities and those that are not. 4. The existence and terms and conditions of residual value guarantees provided by the lessee. 5. The restrictions or covenants imposed by leases, for example, those relating to dividends or incurring additional financial obligations.”

Contracts often bundle asset use with maintenance, utilities, support or other services; if these components are not separated properly the company may mismeasure the lease liability, and the error can also distort expense classification and reduce comparability across contracts. The list of bundled services is open-ended. (jurisdiction: United States (US GAAP, ASC 842 — named by the article), entity_scope: Companies reporting leases, accounting_basis: US GAAP (ASC 842))

“Failing to separate lease and non-lease components . Contracts often bundle asset use with maintenance, utilities, support, or other services. If these components are not separated properly, the company may mismeasure the lease liability. The error can also distort expense classification and reduce comparability across contracts.”

A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset. (jurisdiction: United States, entity_scope: Lessees with finance leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-35-8 A lessee shall amortize the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. However, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise an option to purchase the underlying asset, the lessee shall amortize the right-ofuse asset to the end of the useful life of the underlying asset.”

Partly established. Established: the ongoing charges each treatment produces (S35); which items appear on the balance sheet under the acquisition treatment (S34, S37). Missing: the entries each treatment produces; which terms of the agreement the ongoing records must carry for those charges to be maintained.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation.

The accounts, the periodic charge, and the balance-sheet items each route creates

See As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates.

See At the commencement date a lessee must measure the lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement, and must measure the right-of-use asset as described in paragraph 842-20-30-5.

See At the commencement date the cost of the right-of-use asset must consist of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date less any lease incentives received, and any initial direct costs incurred by the lessee.

See At the commencement date the lease payments must consist of the listed payments relating to use of the underlying asset during the lease term, including fixed payments (including in-substance fixed payments) less lease incentives, index- or rate-linked variable payments measured using the index or rate at commencement, the exercise price of a purchase option the lessee is reasonably certain to exercise, termination penalties where the lease term reflects exercise of a termination option, certain special-purpose-entity structuring fees, and for a lessee amounts probable of being owed under residual value guarantees.

See A lessee should use the rate implicit in the lease whenever that rate is readily determinable and otherwise uses its incremental borrowing rate; a lessee that is not a public business entity is permitted, as an accounting policy election for all leases, to use a risk-free discount rate determined using a period comparable with the lease term.

See For a finance lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) amortisation of the right-of-use asset and interest on the lease liability, variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset.

See For an operating lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis unless another systematic and rational basis is more representative (or the right-of-use asset has been impaired), variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset.

See After the commencement date, for a finance lease a lessee must measure the lease liability by increasing its carrying amount to reflect interest and reducing it to reflect lease payments made, determining interest in each period as the amount producing a constant periodic discount rate on the remaining balance, and must measure the right-of-use asset at cost less accumulated amortisation and accumulated impairment losses.

See After the commencement date, for an operating lease a lessee must measure the lease liability at the present value of the lease payments not yet paid discounted using the discount rate established at commencement (unless updated under paragraph 842-20-35-5) and must measure the right-of-use asset at the amount of the lease liability adjusted for prepaid or accrued lease payments, the remaining balance of lease incentives received, unamortised initial direct costs and impairment, unless the right-of-use asset has previously been impaired.

See A lessee must either present in the statement of financial position or disclose in the notes finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets, and finance lease liabilities and operating lease liabilities separately from each other and from other liabilities; right-of-use assets and lease liabilities are subject to the same current/noncurrent classification considerations as other nonfinancial assets and financial liabilities.

See In the statement of comprehensive income a lessee must present, for finance leases, interest expense on the lease liability and amortisation of the right-of-use asset (which are not required to be presented as separate line items and must be presented consistently with how the entity presents other interest expense and depreciation or amortisation of similar assets) and, for operating leases, lease expense included in income from continuing operations.

See When creating the account, the user is told to select the Other Current Liabilities account type if the loan is to be paid in full within one year, and Long Term Liabilities if it is to be repaid in more than one year.

See The entry increases (credits) the loan/liability account and increases (debits) the corresponding asset account, by the amount of the loan.

See A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation.

What to pull out of the agreement before you post anything

See The transfer-of-ownership criterion is met in leases that provide that, upon the lessee's performance in accordance with the lease terms, the lessor should execute and deliver to the lessee such documents (including, if applicable, a bill of sale) as may be required to release the underlying asset from the lease and transfer ownership to the lessee.

See An entity must determine the lease term as the noncancellable period of the lease together with periods covered by a lessee extension option the lessee is reasonably certain to exercise, periods covered by a termination option the lessee is reasonably certain not to exercise, and periods covered by an option to extend or not to terminate whose exercise is controlled by the lessor.

See At the commencement date an entity assesses whether the lessee is reasonably certain to exercise or not exercise an option by considering all relevant economic factors (contract-based, asset-based, market-based and entity-based), which are interrelated and often require combined consideration; the paragraph gives a non-exhaustive list of example factors including the contractual terms for optional periods compared with current market rates, significant leasehold improvements expected to have significant economic value when the option becomes exercisable, costs of terminating the lease and signing a new one, and the importance of the underlying asset to the lessee's operations.

See At the commencement date the cost of the right-of-use asset must consist of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date less any lease incentives received, and any initial direct costs incurred by the lessee.

See At the commencement date the lease payments must consist of the listed payments relating to use of the underlying asset during the lease term, including fixed payments (including in-substance fixed payments) less lease incentives, index- or rate-linked variable payments measured using the index or rate at commencement, the exercise price of a purchase option the lessee is reasonably certain to exercise, termination penalties where the lease term reflects exercise of a termination option, certain special-purpose-entity structuring fees, and for a lessee amounts probable of being owed under residual value guarantees.

See A lessee must disclose information about the nature of its leases, including a general description of them, the basis and terms and conditions on which variable lease payments are determined, the existence and terms and conditions of options to extend or terminate the lease, the existence and terms and conditions of lessee-provided residual value guarantees, and restrictions or covenants imposed by leases.

See Contracts often bundle asset use with maintenance, utilities, support or other services; if these components are not separated properly the company may mismeasure the lease liability, and the error can also distort expense classification and reduce comparability across contracts. The list of bundled services is open-ended.

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Your books and your tax return can land in different places

Because accounting methods and tax law differ, the amount an employer can deduct for tax purposes may not be the same as the amount it deducts on its business books and records; the publication's illustration is meals, where 100% of the cost can be deducted on the business books and records but only 50% is allowed by law as a tax deduction. (jurisdiction: United States (federal income tax), entity_scope: Employers reimbursing employees' travel and non-entertainment-related meals expenses, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published; the meals figure is given as an example, at the 50% limit stated in this publication)

“Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. For example, you can deduct 100% of the cost of meals on your business books and records. However, only 50% of these costs are allowed by law as a tax deduction.”

There may be instances in which a taxpayer must determine whether its payments are for rent or for the purchase of the property; the taxpayer must first determine whether the agreement is a lease or a conditional sales contract, and payments made under a conditional sales contract are not deductible as rent expense. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers making payments for the use of property under an agreement that may be a lease or a conditional sales contract, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)

“Lease or purchase. There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. You must first determine whether your agreement is a lease or a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense.”

If the agreement is a lease, the taxpayer may deduct the payments as rent. (jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax, conditions: the agreement is a lease)

“If the agreement is a lease , you may deduct the payments as rent.”

The cost of property treated as outright purchased and used in a trade or business may generally be recovered through depreciation deductions. (jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax, conditions: the agreement is a conditional sales contract, so the taxpayer is the outright purchaser; the property is used in a trade or business)

“You may generally recover the cost of such property used in a trade or business through depreciation deductions.”

Payments made to change certain provisions in a lease must be capitalized and amortized over the remaining period of the lease and cannot be deducted as additional rent, even if they are described as rent in the agreement. (jurisdiction: United States (federal income tax), entity_scope: Lessees paying an additional amount to modify a lease, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)

“You must capitalize these payments and amortize them over the remaining period of the lease. You can’t deduct the payments as additional rent, even if they are described as rent in the agreement.”

Generally, where the special rules for certain leases of tangible property apply, an accrual method of accounting (and time value of money principles) must be used for rental expenses regardless of the taxpayer's overall method of accounting. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers whose leases of tangible property meet the conditions for the section 467 special rules stated in this section, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)

“Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting.”

When an expense can be deducted depends on the taxpayer's accounting method, which is a set of rules used to determine when and how income and expenses are reported; the two basic methods are the cash method and the accrual method, and whichever method is chosen must clearly reflect income. (jurisdiction: United States (federal income tax), entity_scope: Businesses deducting business expenses on U.S. federal income tax returns, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)

“When you can deduct an expense depends on your accounting method. An accounting method is a set of rules used to determine when and how income and expenses are reported. The two basic methods are the cash method and the accrual method. Whichever method you choose must clearly reflect income.”

Generally, IRS approval must be obtained to change a method of accounting; Form 3115 is filed to request a change to a permissible method of accounting for amortization. (jurisdiction: United States (federal income tax), entity_scope: Taxpayers changing their method of accounting for amortization, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)

“Generally, you must get IRS approval to change your method of accounting. File Form 3115 to request a change to a permissible method of accounting for amortization.”

Not established from an authoritative source.

Rent deduction versus purchase for tax, and keeping the two sets of figures straight

See Because accounting methods and tax law differ, the amount an employer can deduct for tax purposes may not be the same as the amount it deducts on its business books and records; the publication's illustration is meals, where 100% of the cost can be deducted on the business books and records but only 50% is allowed by law as a tax deduction.

See There may be instances in which a taxpayer must determine whether its payments are for rent or for the purchase of the property; the taxpayer must first determine whether the agreement is a lease or a conditional sales contract, and payments made under a conditional sales contract are not deductible as rent expense.

See If the agreement is a lease, the taxpayer may deduct the payments as rent.

See The cost of property treated as outright purchased and used in a trade or business may generally be recovered through depreciation deductions.

See Payments made to change certain provisions in a lease must be capitalized and amortized over the remaining period of the lease and cannot be deducted as additional rent, even if they are described as rent in the agreement.

See Generally, where the special rules for certain leases of tangible property apply, an accrual method of accounting (and time value of money principles) must be used for rental expenses regardless of the taxpayer's overall method of accounting.

See When an expense can be deducted depends on the taxpayer's accounting method, which is a set of rules used to determine when and how income and expenses are reported; the two basic methods are the cash method and the accrual method, and whichever method is chosen must clearly reflect income.

See Generally, IRS approval must be obtained to change a method of accounting; Form 3115 is filed to request a change to a permissible method of accounting for amortization.

Not established from an authoritative source.

When the arrangement ends: return, buy, or renew

A termination of a lease resulting from the lessee's purchase of the underlying asset is not the type of termination contemplated by paragraph 842-20-40-1 but is an integral part of the purchase, and any difference between the purchase price and the carrying amount of the lease liability immediately before the purchase must be recorded by the lessee as an adjustment of the carrying amount of the asset; this does not apply to underlying assets acquired in a business combination. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-40-2 The termination of a lease that results from the purchase of an underlying asset by the lessee is not the type of termination of a lease contemplated by paragraph 842-20-40-1 but, rather, is an integral part of the purchase of the underlying asset. If the lessee purchases the underlying asset, any difference between the purchase price and the carrying amount of the lease liability immediately before the purchase shall be recorded by the lessee as an adjustment of the carrying amount of the asset. However, this paragraph does not apply to underlying assets acquired in a business combination, which are initially measured at fair value in accordance with paragraph 805-20-30-1.”

In the Update's illustrative Example 23, when the lessee exercises the purchase option at the end of Year 5 it settles the remaining lease liability (which equals the option exercise price) and, if the right-of-use asset was not previously presented together with property, plant, and equipment, reclassifies the right-of-use asset to property, plant, and equipment and applies Topic 360 to it beginning on the date the purchase option is exercised. (jurisdiction: United States, entity_scope: Illustrative example of a lessee finance lease of equipment with a purchase option under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Illustrative example, not a separate requirement; Pending content of Topic 842 as amended by ASU 2016-02)

“842-10-55-217 At the end of Year 5, the carrying amount of the right-of-use asset is $71,094 ($248,834 – [$35,548 × 5]), and the remaining lease liability is $5,000, which is the exercise price of the purchase option. Lessee exercises the purchase 80 option and settles the remaining lease liability. If the right-of-use asset was not previously presented together with property, plant, and equipment, Lessee reclassifies the right-of-use asset to property, plant, and equipment and applies Topic 360 to the asset beginning on the date the purchase option is exercised.”

See A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset.

If a lease is modified and the modification is not accounted for as a separate contract under paragraph 842-10-25-8, the entity must reassess the classification of the lease as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date. (jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-25-9 If a lease is modified and that modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8, the entity shall reassess the classification of the lease as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date (for example, the fair value and remaining economic life of the underlying asset as of that date).”

A lessee must reallocate the remaining consideration in the contract and remeasure the lease liability using a discount rate determined at the effective date of the modification if the modification grants an additional right of use not accounted for as a separate contract, extends or reduces the term of an existing lease other than through exercise of a contractual option to extend or terminate, fully or partially terminates an existing lease, or changes only the consideration in the contract. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-25-11 A lessee shall reallocate the remaining consideration in the contract and remeasure the lease liability using a discount rate for the lease determined at the effective date of the modification if a contract modification does any of the following: a. b. c. d. Grants the lessee an additional right of use not included in the original contract (and that modification is not accounted for as a separate contract in accordance with paragraph 842-10-25-8) Extends or reduces the term of an existing lease (for example, changes the lease term from five to eight years or vice versa), other than through the exercise of a contractual option to extend or terminate the lease (as described in paragraph 842-20-35-5) Fully or partially terminates an existing lease (for example, reduces the assets subject to the lease) Changes the consideration in the contract only.”

A lessee must reassess the lease term or a lessee purchase option only if and at the point in time that one of the listed events occurs: a significant event or change in circumstances within the lessee's control that directly affects whether the lessee is reasonably certain to exercise or not exercise an extension, termination or purchase option; an event written into the contract obliging the lessee to exercise or not exercise an extension or termination option; the lessee elects to exercise an option previously assessed as not reasonably certain; or the lessee elects not to exercise an option previously assessed as reasonably certain. (jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-10-35-1 A lessee shall reassess the lease term or a lessee option to purchase the underlying asset only if and at the point in time that any of the following occurs: a. b. c. d. There is a significant event or a significant change in circumstances that is within the control of the lessee that directly affects whether the lessee is reasonably certain to exercise or not to exercise an option to extend or terminate the lease or to purchase the underlying asset. There is an event that is written into the contract that obliges the lessee to exercise (or not to exercise) an option to extend or terminate the lease. The lessee elects to exercise an option even though the entity had previously determined that the lessee was not reasonably certain to do so. The lessee elects not to exercise an option even though the entity had previously determined that the lessee was reasonably certain to do so.”

If the lease term or the assessment of a lessee purchase option changes so that the remaining lease term extends more than 12 months beyond the end of the previously determined lease term, or the lessee becomes reasonably certain to exercise its purchase option, the lease no longer meets the definition of a short-term lease and the lessee must apply the remainder of Topic 842 as if the date of the change in circumstances were the commencement date. (jurisdiction: United States, entity_scope: Lessees applying the short-term lease exemption under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)

“842-20-25-3 If the lease term or the assessment of a lessee option to purchase the underlying asset changes such that, after the change, the remaining lease term extends more than 12 months from the end of the previously determined lease term or the lessee is reasonably certain to exercise its option to purchase the underlying asset, the lease no longer meets the definition of a short-term lease and the lessee shall apply the remainder of the guidance in this Topic as if the date of the change in circumstances is the commencement date.”

Partly established. Established: how each treatment is concluded when the arrangement ends by exercise of a purchase option (S50); how each treatment is concluded when the arrangement ends by renewal (S54). Missing: how each treatment is concluded when the arrangement ends by return of the equipment.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

What to post on return of the equipment, exercise of a purchase option, or renewal

See A termination of a lease resulting from the lessee's purchase of the underlying asset is not the type of termination contemplated by paragraph 842-20-40-1 but is an integral part of the purchase, and any difference between the purchase price and the carrying amount of the lease liability immediately before the purchase must be recorded by the lessee as an adjustment of the carrying amount of the asset; this does not apply to underlying assets acquired in a business combination.

See In the Update's illustrative Example 23, when the lessee exercises the purchase option at the end of Year 5 it settles the remaining lease liability (which equals the option exercise price) and, if the right-of-use asset was not previously presented together with property, plant, and equipment, reclassifies the right-of-use asset to property, plant, and equipment and applies Topic 360 to it beginning on the date the purchase option is exercised.

See A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset.

See If a lease is modified and the modification is not accounted for as a separate contract under paragraph 842-10-25-8, the entity must reassess the classification of the lease as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date.

See A lessee must reallocate the remaining consideration in the contract and remeasure the lease liability using a discount rate determined at the effective date of the modification if the modification grants an additional right of use not accounted for as a separate contract, extends or reduces the term of an existing lease other than through exercise of a contractual option to extend or terminate, fully or partially terminates an existing lease, or changes only the consideration in the contract.

See A lessee must reassess the lease term or a lessee purchase option only if and at the point in time that one of the listed events occurs: a significant event or change in circumstances within the lessee's control that directly affects whether the lessee is reasonably certain to exercise or not exercise an extension, termination or purchase option; an event written into the contract obliging the lessee to exercise or not exercise an extension or termination option; the lessee elects to exercise an option previously assessed as not reasonably certain; or the lessee elects not to exercise an option previously assessed as reasonably certain.

See If the lease term or the assessment of a lessee purchase option changes so that the remaining lease term extends more than 12 months beyond the end of the previously determined lease term, or the lessee becomes reasonably certain to exercise its purchase option, the lease no longer meets the definition of a short-term lease and the lessee must apply the remainder of Topic 842 as if the date of the change in circumstances were the commencement date.

Partly established. Established: what happens at the end of the arrangement under each treatment on exercise of a purchase option (S50); what happens at the end of the arrangement under each treatment on renewal (S54). Missing: what happens at the end of the arrangement under each treatment on return of the equipment.

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Fixing an arrangement recorded the wrong way in earlier periods

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government.

Correcting a misclassified arrangement and what must be restated or disclosed

Not established from an authoritative source.

Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government.