When a lease passes burden of proof, how is the lessor's tax treatment characterized?

When a lease passes burden of proof, how is the lessor's tax treatment characterized?

• A. True Lease: Rental payments are recognized as income and the leased asset is capitalized and depreciated using tax depreciation methods.
• B. Financing arrangement; all payments are deductible as interest.
• C. Not taxable until the lease ends.
• D. The lessee claims all depreciation on the asset.

Answer: (A)

When a lease passes burden of proof, it is treated as a true lease. In this setup the lessor keeps ownership for tax purposes, so rental payments are reported as ordinary income over the lease term. The lessor also capitalizes the asset on its books and depreciates it using the applicable tax depreciation methods. The lessee treats the payments as a rental expense and does not depreciate the asset. This differs from a financing arrangement, where the lessee would capitalize the asset and deduct depreciation (and the payments might be allocated as interest), and it wouldn’t be deferred taxation until the end.

When a lease passes burden of proof, it is treated as a true lease. In this setup the lessor keeps ownership for tax purposes, so rental payments are reported as ordinary income over the lease term. The lessor also capitalizes the asset on its books and depreciates it using the applicable tax depreciation methods. The lessee treats the payments as a rental expense and does not depreciate the asset. This differs from a financing arrangement, where the lessee would capitalize the asset and deduct depreciation (and the payments might be allocated as interest), and it wouldn’t be deferred taxation until the end.