The Leasing Timing Trap

Why the “When” Matters More Than You Think in Lease Taxation

Even if you understand the book vs. tax differences in leasing, timing issues can still lead to tax surprises. That’s because taxable income might hit in years where cash flow doesn’t match, making effective planning even more important.

Key Timing Differences to Watch:

1. Aging Portfolios

With Sales-Type/Finance Leases, book income is front-loaded through the amortization schedule. Early lease years show high finance income, which declines over time. As your portfolio matures, you’ll reverse less income – but likely still add back the same amount of rents, causing timing mismatches.

2. Depreciation Phase-Out

Many lessors took advantage of bonus depreciation in recent years. If you’re not writing enough new leases, you may run out of depreciation deductions to offset taxable income from aging portfolios.

3. Non-Recourse Discounting

With non-recourse transactions, early payoffs or defaults can trigger an acceleration of income. You may be required to recognize all remaining rents (and deduct related interest) in the year the event occurs – causing a spike in taxable income.

4. Cash vs. Accrual Method

• If you're on accrual, you recognize rents as earned.

• If you're on cash, timing can vary – especially with prepayments or catch-up payments.

• Also, keep an eye on lessee accruals. If they’re falling behind, you may need to move them to non-accrual to avoid overstating taxable income.

  
  

Need help navigating it all?

Contact ECS Financial Services – we specialize in leasing-specific tax planning and strategy.