Lease accounting is a specialized type of accounting that businesses must follow when they lease equipment or real estate. This type of accounting requires the business to report the leased assets to the IRS in a very specific manner. If your business deals with leased equipment (i.e., construction equipment) or real estate (i.e., office buildings), you’ll want to read on.
What is Lease Accounting?
In short, lease accounting is a way for businesses to report leased assets on their financial statements. There are specific rules that businesses must follow when reporting leased assets, and these rules are outlined by the Financial Accounting Standards Board (FASB).
What Does Lease Accounting Entail?
Lease accounting can be complex, but in general, it requires businesses to track two types of leases: capital leases and operating leases. Capital leases are more like purchases, as the business owns the asset at the end of the lease term. Operating leases, on the other hand, are more like rentals, as the business does not own the asset at the end of the lease term.
How Does Lease Accounting Impact Businesses?
Lease accounting can have a big impact on businesses, as it can affect their net income, assets, and liabilities. It’s important for businesses to understand how lease accounting works and to comply with the FASB’s rules.
Leasing Equipment vs. Buying Equipment for a Business
There are pros and cons to both leasing equipment and buying equipment outright. When you lease equipment, you’re able to avoid the upfront costs of purchasing the equipment. Additionally, lease payments are often tax-deductible, which can help reduce your business’s taxable income. However, when you lease equipment, you typically don’t own it at the end of the lease term, so you may not be able to use it for other purposes.
When you buy equipment outright, you immediately own it and can use it for whatever purpose you choose. However, you’ll have to pay the full price of the equipment upfront, and you may not be able to write off the entire cost of the equipment on your taxes.
Leasing vs. Renting Real Estate for a Business
Leasing vs. renting real estate is a little bit different than leasing vs. buying equipment. When you lease real estate, you’re essentially renting it for a fixed period of time. At the end of the lease term, you have the option to renew or walk away.
When you rent real estate, you’re essentially renting it for an indefinite period of time. You can’t usually renew your lease when it expires, so you’ll need to find a new place to live.
How Does a Business Manage Lease Accounting?
First, it’s imperative for any business to invest in the right type of lease accounting software. This software will help the business track their capital and operating leases, as well as their associated expenses. Additionally, businesses should create lease files for each of their leased assets. This will help ensure that the business is reporting all of its leased assets in a timely and accurate manner.
Choosing Lease Accounting Software
A quick Google search will yield a lot of results for different types of software your business can use for its lease accounting. When choosing software, it’s important to make sure that the software is up to date with the latest FASB guidelines. You’ll also want to make sure that the software is user-friendly and easy to navigate. Be sure to check for reviews from users as well.
The Bottom Line
Make sure you are familiar with lease accounting and how it applies to your business. If you fail to properly account for leased equipment and assets under FASB’s guidelines, you could face steep penalties.