Don’t Let Taxes on Your Leasing Activities Sneak Up on You

Book vs. Tax Differences Every Lessor Should Understand

If you’ve ever faced an unexpected tax bill tied to your leasing activities, it probably stems from the many differences between book accounting and tax treatment. These mismatches can affect the timing and recognition of income, expenses, and gains—and understanding them is key to proactive tax planning.

Common Book vs. Tax Differences:

1. Depreciation

Many lessors structure leases as tax leases to capture depreciation deductions. But GAAP treatment may differ depending on whether it’s classified as an Operating Lease or a Sales-Type/Finance Lease. Book depreciation may not be recorded the same way.

2. Rents vs. Finance Income

Finance leases that qualify as tax leases require two adjustments:

• Reverse the finance income recorded for book purposes

• Add back the full rents invoiced for the year

  
  

3. Discounting & Assignments

If you sell or assign leases, the tax treatment depends on whether you retain the rights to the asset and its depreciation. Often, you’ll need to:

• Reverse the gain on sale reported for book

• Add back assigned rents

• Deduct interest as if the proceeds were a note payable, not a sale

  
  

4. Gains & Losses on Asset Sales

Tax and book basis can differ widely, especially if you used bonus depreciation. At lease-end, a book residual might equal the asset’s carrying value—so there’s no gain/loss. But for tax, a fully depreciated asset has a $0 basis, so the entire sale amount becomes taxable income.

5. Allowances

You can only deduct realized losses on your tax return. Any loss allowances recorded for book purposes must be reversed.

Need help navigating it all? Contact ECS Financial Services – we specialize in leasing-specific tax planning and strategy.