What are some ways that the TCJA might affect lessees and lessors?

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What are some ways that the TCJA might affect lessees and lessors?

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What are some ways that the TCJA might affect lessees and lessors?

Explanation & AnswerSolution by a verified expert

Explanation

Some ways by which TCJA affects both lessor and lessee are:

The tax cuts and jobs act (TCJA) had reduced the corporate tax rate to 21% which has resulted in reduction in the demand of leases due to smaller tax savings. However, this has induced the lessors to offer better deals as the tax burden will be lower.
The Tax Cuts and Jobs Act (TCJA) introduced the concept of rapid depreciation where the bonus depreciation reduces the taxable income of assessee and eventually the tax liability. In the case of finance lease, depreciation on the asset is recorded in the books of the lessee, so the lessee will be benefited from the rapid depreciation through the reduction in taxable income. In case of operating lease, the bonus depreciation is recorded in the books of the lessor, so the lessor will be benefited from rapid depreciation in the form of tax savings.
Lastly, the TCJA had put a limit on the interest expense that can be deducted in a particular year. Any excess amount will be carried forward to the future years.

Verified Answer

The ways by which the Tax Cuts and Jobs Act (TCJA) affected the lessee are:

The Tax Cuts and Jobs Act (TCJA) introduced a reduction in the corporate tax rate which lowered the demand of leases agreement because the tax savings due to the interest expenses will be lower.
The TCJA put a limit on interest expense that can be deducted in a year. So, the lessee can claim a limited amount as interest expense during a particular year and any excess interest expense is deferred to the future years .
The Tax Cuts and Jobs Act (TCJA) introduced the concept of rapid depreciation. The rapid depreciation helps in tax savings to the lessee, in the case of finance lease by deducting higher depreciation in the initial years of the lease term.

The ways by which the Tax Cuts and Jobs Act (TCJA) affected the lessor are:

The TCJA reduced the corporate tax rate which in turn induces the lessor to offer better deals in the market because of reduction in tax burden.
The TCJA puts a limit on interest expense that can be claimed in a year which in turn reduces the interest income of the lessor and defers any excess interest income to the future years.
The Tax Cuts and Jobs Act (TCJA) introduced rapid depreciation. Rapid depreciation in the initial years helps in tax savings to the lessor in case of operating lease.

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