My client recently negotiated a lease which provided for a discount for the term of the lease to be paid in this tax year. The lease was entered into in October of 2011.The amount of the discount is $ 35,000.00 The client is a sub chapter s corp. The company files on an accural basis. I believe that discount must be reported as additional income, or a reduction in leasing expense, if you prefer, in this tax year even though the discount applies to the first 3 years of a 5 year lease. Obviously reporting all the discount in one tax year will have a serious affect on my client's tax liabilty. Is there another way to skin this cat that would allow us to allocate this discount monthly over the term of the lease? It would be nice to be able to recognize only the portion of the discount the applies to an individual tax year. My client has already received the lum sump. It is the vendor's policy to pay the discount only in a lump sum. Appreciate any forth coming advice.
-
-
Leasing What?
Randy, there is a convenient avoidance mechanism if this is a capital lease.
In other words, if this is a lease with option to buy, especially if the "option" is nominal, this may be a "capital" lease.
Capital leases are recorded at present value, which would have the effect of spreading out this discount over the life of the lease.
It also helps if your client is on the accrual method instead of cash method. -
If the lease discount applies to the first three years, and your client reports on the accrual basis, then I'd say the discount should be accrued and amortized over those three years.Comment
Comment