Under true lease tax treatment, who depreciates the asset for tax purposes?

• A. The lessee depreciates using book depreciation.
• B. The asset is not depreciated.
• C. Both parties depreciate the asset.
• D. The lessor depreciates the leased asset for tax purposes.

Answer: (D)

In a true lease, the tax ownership of the asset stays with the lessor. That means the lessor is the one who depreciates the asset for tax purposes, recovering the asset’s cost over its useful life. The lessee, on the other hand, deducts lease payments as a rental expense rather than depreciation. This distinction is what separates a true operating lease from a finance (capital) lease: in a finance lease, the lessee would typically be treated as the tax owner and could claim depreciation. Here, because it’s a true lease, depreciation goes to the lessor.