Capital Leases, Cost Basis and Capital Gains

[Lessee]

A capital lease involves the transfer of the ownership of the property or asset to the Lessee.  As a result, the present market value of the asset is included on the balance sheet. 

The lease is considered as a loan and the interest payments are expensed on the income statement.  The net value of all the future payments towards the lease is the loan amount that is treated as a liability.

If the present value of the lease payments equal the property's market value, is this value considered the Lessee's cost basis?

[Anonymous_]

See https://www.accountingtools.com/articles/what-is-the-accounting-for-a-capital-lease.html

[Mike9241]

the rules for tax purposes are different than what they are for accounting purposes.  so a lease may be a capital lease under one set of rules but an operating lease under the other. it may also be possible that the lease is capital under both sets of rules but the capitalized amount may be different.

here is a discussion of bot

https://www.thebalancesmb.com/capital-leases-versus-operating-leases-398034#:~:text=For%20tax%20purp... 

[Lessee]

Thanks @Anonymous_ 

After much reading, it seems that the cost of the asset (cost basis) is the smaller of the fair market value of the asset OR the present value of the lease payments.  This number is capitalized in the balance sheet as a ROU asset.

[Lessee]

Thanks @Mike9241 

For example, it's possible that capitalized amount can be recalculated using the Fed's nominal interest rates as follows

Nominal Discount Rates.   A forecast of nominal or market interest rates for calendar year 2021 based on the economic assumptions for the 2022 Budget is presented below. These nominal rates are to be used for discounting nominal flows, which are often encountered in lease-purchase analysis.

Nominal Interest Rates on Treasury Notes and Bonds
of Specified Maturities (in percent)

3-Year                5-Year                7-Year                IO-Year               20-Year               30-Year
  0.2                      0.3                     0.6                      0.8                        1.5                       1.7

Why would the capitalize amount be recalculated especially if the Lessor publishes its interest rate used to calculate the lease payments?

[Mike9241]

what do you mean recalculated? are you asking from a tax standpoint or accounting standpoint?  I have never seen "ROU" used in tax literature.  

[SweetieJean]

Is this a homework or exam question?

ROU = Right of Use (asset)

[Lessee]

Maybe I misunderstood.

you stated that " it may also be possible that the lease is capital under both sets of rules but the capitalized amount may be different."

I'm thinking, as a Lessee, if I know the Lessor's implicit interest rate, then I can calculate the capitalized amount.  But the capitalized amount could be different under another set of rules.

[Lessee]

No.  This isn't a homework or exam question. 

I wanted to understand leases for business use.