In a true tax lease, which depreciation and tax treatment describes the lessor's role?

In a true tax lease, which depreciation and tax treatment describes the lessor's role?

• A. Depreciation expense recognition by the lessee and deferral of taxes.
• B. Depreciation expense recognition by the lessee.
• C. Depreciation expense recognition by the lessor and deferral of income taxes.
• D. No depreciation or tax benefits in a lease.

Answer: (C)

In a true tax lease, the lessor retains tax ownership of the asset and can claim depreciation. That depreciation reduces the lessor’s taxable income in the current period, which defers a portion of the income taxes due. The lessee does not get depreciation on the asset and instead deducts lease payments as operating expenses. So the correct description is that the lessor recognizes depreciation and benefits from deferring income taxes through those depreciation deductions.

In a true tax lease, the lessor retains tax ownership of the asset and can claim depreciation. That depreciation reduces the lessor’s taxable income in the current period, which defers a portion of the income taxes due. The lessee does not get depreciation on the asset and instead deducts lease payments as operating expenses. So the correct description is that the lessor recognizes depreciation and benefits from deferring income taxes through those depreciation deductions.