This presentation covers the tax implications of deferred rent under current GAAP lease accounting standards, FASB 840. This presentation: -defines deferred rent -discusses the differences between liabilities and assets -provides an example with journal entries to contextualize

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Tax Effect of Deferred Rent
Under Current GAAP Lease Accounting Rules
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What To Expect
● Review what deferred rent is with
an example
● Discuss the difference between
deferred tax liabilities and assets
● Show an example with journal
entries of the tax effect of
deferred rent
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What is Deferred Rent
Deferred rent is the liability that is created as a result of
the difference between actual cash paid and the
straight-line expense recorded on the financial
statements
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Deferred Rent Example
● Lessee leases a building from a lessor and the lease is operating
● Lease term is 5 years
● Rent payments are $10,000 for the first year, escalating 5% per year
● To record the first year journal entry calculate the straight-line expense
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Book Year 1 Journal Entry:
DR Rent Expense 11,051.26
CR Cash 10,000.00
CR Deferred Rent 1,051.26

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Deferred Tax Effect
● One of the basic principles of Topic 740 (Income Taxes) is that deferred taxes
have to be recognized for temporary differences between the financial
statements and tax returns
● Deferred taxes are recognized for future tax consequences of events recorded
in either the financial statements or the tax return, but not yet in both
● Deferred tax liabilities are recorded for taxable temporary differences while
deferred tax assets are recorded for deductible temporary differences
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Example
● Lessee leases a building from a lessor and classifies the lease as operating.
● Lease term is 10 years.
● Rent payments are $100,000 in the first year, escalating 3% per year. Payments
are made in arrears.
● Lessee incurred $10,000 in initial direct costs (IDC) related to the lease.
● Lessee has a tax rate of 30%
● Assume the lease is a true tax lease for income tax purposes and that rent is
deductible as paid for tax purposes.
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Example
● In year 1, the lessee will make the
following entry:
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● Note 1: Total lease payments of
1,146,388 + 10,000 IDC divided by
10 years.
● Note 2: 10,000 IDC divided by 10
years.
● Note 3: The deferred rent in this
example is a plug that will make the
entry balance, or it can be calculated
as the straight-line expense less the
cash paid each year.
● Lease term is 10 years.
● Rent payments are $100,000 in the first year, escalating 3% per year. Payments
are made in arrears.
● Lessee incurred $10,000 in initial direct costs (IDC) related to the lease.

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Example
● In year 1, the lessee will make the following additional entries:
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● Lessee has a tax rate of 30%
● Assume the lease is a true tax lease for income tax purposes and that rent is
deductible as paid for tax purposes.
● At the end of the first year, the Lessee’s
deductible expenses for tax purposes is 101,000
(actual cash paid plus Year 1 amortization of the
IDC), as a result, the lessee would record a
current tax benefit of 30,300 (101,000 X 30%).
● The lessee’s deductible expenses for tax
purposes is 101,000; while lease expense for
book purposes is 115,639 (see note 1 above).
The deferred rent of 14,639 constitutes a
temporary difference that needs to be
tax-effected to determine the associated deferred
tax asset. The deferred rent would be multiplied
by the tax rate

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