Assets purchased under a capital lease and written off as Section 179 expense for tax year. Books are kept under tax basis. How would the lease payments be booked on these assets going forward? Dr. Asset, Cr. Cash? And, just don't depreciate these assets as they were already expensed under Sec. 179?
You need to first compute the present value of the asset as part of each lease payment will be expensed as interest. Next you should have debited a Fixed Asset account and credited a capital lease payable account for the present value of the leased asset. . As you make the payments you debit the lease payable, debit interest expense, and credit cash.
Mimbreno, the company uses the cash basis and no accrual. So if there is no payable to be on the books, how would I now book each lease payment on these assets?
Same way. You are not effecting any income and expense accounts that would change you from cash basis to accrual accounting. You will be incurring interest expense but it will only be recorded when paid.
Mimbreno, but then the books with have a payable account. From my understanding, cash basis balance sheet should have no payables, correct?
Also, just to clarify...
I will book the fixed asset as the PV of the lease payments. Then when I make the first lease payment, I will debit capital lease payable, interest expense, and credit cash. There will be no accumulated depreciation account at all for this asset, correct?
How do I book the security deposit payment as well?
Cash basis does not necessarily mean you have no liabilities on your balance sheet. It only refers to the receipt of income and the payment of expenses. The lease payable is not an expense, it is a liability. You will need an accumulated depreciation account as well as a depreciation expense account. You will depreciate the PV of the asset over it's useful life. If you take a section 179 expense for tax purposes you can also do that for book purposes if you keep your books on an income tax basis. If you want you can depreciate over the life of the asset for book purposes but take the 179 expense deduction for book purposes.
Mimbreno, you have been extremely helpful. Just to clarify, I am going to take the 179 expense on these assets. And, because I keep books on an income tax basis, will I also be able to depreciate them on a going forward basis over their tax lives as well, even though I have already recognized these assets as an expense under 179?
Not quite. If you present your financial statements on an income tax basis that means you use the same depreciation method for books and for tax purposes. If you are presenting your books as cash basis (not necessarily income tax basis) then you could depreciate over the life of the asset rather than take a full book depreciation in the same year you take a section 179 for tax purposes. You could even use straight line for book purposes. Accounting rules for book purposes are not the same as for tax purposes. Your books should strive to present as realistic a picture as possible for the owners and creditors. Your taxes should strive to reduce the tax effects of your client's business income as much as possible. The two purposes can be at odds with each other. Accountants often include notes to the financial statements that address the basis of accounting and other items to be sure the users are not misled.
Ok, understood. I keep the books under tax basis. Therefore, my book and tax depreciation will be the same. So, because I am capturing the 179 depreciation on these assets, I will not depreciate them in the future, as they are already being fully expensed for tax purposes utilizing 179. Book and tax are the same, as I keep the books on income tax basis.
