Question

Capital Leases, Cost Basis and Capital Gains

Forum|Forum|3 years ago
August 17, 2022
2 replies
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A capital lease involves the transfer of the ownership of the property or asset to the Lessee. As a result, the present market value of the asset is included on the balance sheet.

The lease is considered as a loan and the interest payments are expensed on the income statement. The net value of all the future payments towards the lease is the loan amount that is treated as a liability.

If the present value of the lease payments equal the property's market value, is this value considered the Lessee's cost basis?

A

Anonymous_

Employee

See https://www.accountingtools.com/articles/what-is-the-accounting-for-a-capital-lease.html

L

LesseeAuthor

Thanks @Anonymous_

After much reading, it seems that the cost of the asset (cost basis) is the smaller of the fair market value of the asset OR the present value of the lease payments. This number is capitalized in the balance sheet as a ROU asset.

M

Mike9241

the rules for tax purposes are different than what they are for accounting purposes. so a lease may be a capital lease under one set of rules but an operating lease under the other. it may also be possible that the lease is capital under both sets of rules but the capitalized amount may be different.

here is a discussion of bot

https://www.thebalancesmb.com/capital-leases-versus-operating-leases-398034#:~:text=For%20tax%20purposes%2C%20a%20lease%20is%20considered%20a,an%20option%20to%20buy%20at%20a%20bargain%20price

L

LesseeAuthor

Thanks @Mike9241

For example, it's possible that capitalized amount can be recalculated using the Fed's nominal interest rates as follows

Nominal Discount Rates. A forecast of nominal or market interest rates for calendar year 2021 based on the economic assumptions for the 2022 Budget is presented below. These nominal rates are to be used for discounting nominal flows, which are often encountered in lease-purchase analysis.

Nominal Interest Rates on Treasury Notes and Bonds
of Specified Maturities (in percent)

3-Year 5-Year 7-Year IO-Year 20-Year 30-Year
0.2 0.3 0.6 0.8 1.5 1.7