CLFP Tax & Accounting in Leasing

Question 1

Under ASC 842, how does a lessee record a finance lease on its balance sheet?

Accepted Answer

As a right-of-use (ROU) asset and a corresponding lease liability

Answer

As an operating expense only with no balance sheet impact

Answer

As equipment owned outright with a corresponding loan payable

Answer

As a contingent liability disclosed in footnotes only

Question 2

What is 'bonus depreciation' and how does it benefit equipment lessors and lessees?

Accepted Answer

An IRS provision allowing immediate expensing of a large percentage of qualifying equipment cost in the first year, providing significant tax savings

Answer

A depreciation method that accelerates deductions in final years

Answer

Extra depreciation allowed for environmentally friendly equipment only

Answer

A state-level tax incentive for equipment manufacturers

Question 3

What is a 'true lease' for tax purposes and why does it matter?

Accepted Answer

A lease where the lessor is treated as the owner for tax purposes and can claim depreciation deductions on the equipment

Answer

A lease that is exactly 36 months in length

Answer

A lease with no purchase option at the end

Answer

A lease approved by the IRS Revenue Ruling 55-540

Question 4

What is Section 179 of the IRS tax code in the context of equipment financing?

Accepted Answer

A provision allowing businesses to immediately deduct the full cost of qualifying equipment purchases up to an annual dollar limit

Answer

The code section governing lease accounting under GAAP

Answer

A provision limiting interest deductibility for lessors

Answer

The tax rule for depreciation of real property

Question 5

What is the MACRS depreciation system and why is it important in equipment leasing?

Accepted Answer

Modified Accelerated Cost Recovery System; it is the tax depreciation method required by the IRS for most business equipment, affecting lessor tax benefits

Answer

A voluntary GAAP accounting standard for lease assets

Answer

A state property tax assessment system for equipment

Answer

A method for calculating residual values

Question 6

What is a 'leveraged lease' from a tax and accounting perspective?

Accepted Answer

A lease in which the lessor uses debt (typically 60-80% of equipment cost) from a third-party lender to fund the transaction, with the lessor owning the equipment and claiming tax benefits

Answer

A lease where the lessee borrows to make a down payment

Answer

A lease structured with variable payments tied to market rates

Answer

A government-sponsored lease for infrastructure projects