Which statement describes a true tax lease?

Which statement describes a true tax lease?

• A. In a true tax lease, the lessor recognizes lease payments as rental income and can claim depreciation.
• B. The lessee claims depreciation for the asset.
• C. The asset is owned by the lessee for tax purposes.
• D. There is no tax impact for either party.

Answer: (A)

In a true tax lease, the asset’s tax ownership stays with the lessor. That means the lessor reports rental income from the lease and can claim depreciation on the asset for tax purposes. The lessee, on the other hand, uses the asset and typically deducts lease payments as an operating expense, but does not claim depreciation or own the asset for tax purposes. This structure is why the statement describing the lessor’s rental income and depreciation is correct. The other ideas don’t fit true tax lease treatment: having the lessee claim depreciation would imply the lessee owns the tax benefits, which isn’t the case here; the asset being owned for tax purposes by the lessee would also contradict the tax ownership being with the lessor; and saying there’s no tax impact ignores the depreciation and income effects that do occur for the lessor.

In a true tax lease, the asset’s tax ownership stays with the lessor. That means the lessor reports rental income from the lease and can claim depreciation on the asset for tax purposes. The lessee, on the other hand, uses the asset and typically deducts lease payments as an operating expense, but does not claim depreciation or own the asset for tax purposes. This structure is why the statement describing the lessor’s rental income and depreciation is correct.

The other ideas don’t fit true tax lease treatment: having the lessee claim depreciation would imply the lessee owns the tax benefits, which isn’t the case here; the asset being owned for tax purposes by the lessee would also contradict the tax ownership being with the lessor; and saying there’s no tax impact ignores the depreciation and income effects that do occur for the lessor.