I have a client who owns an S Corporation. The company recently leased a new auto for the owner. I haven't recorded a lease in a while, so I need to know how to set up the journal entry.
More importantly, can the company depreciate the cost of the vehicle, or does it just write off the lease payment each month along with the gas, oil, etc.?
(I know I also need to include the personal use portion in the shareholder's W-2, etc.)
Since the S corp does not own the vehicle, they can not depreciated it. They write off the lease and actual operating cost.
Personal use of the vehicle is only includable as income to the employee if the employee does not reimburse the employer for the personal use of the vehicle.
From an accounting standpoint, is there a need to record the liability owed (for the next 3 years) to the leasing company? That is, do I need to establish a liability on the balance sheet? (If so, what is the DEBIT side of the entry??)
You first have to look at the lease to determine if this is a operating lease or a financial lease.
If the lease requires the return of the vehicle with only an option to purchase at fair market value, then it is normally an operating lease. In such case there is nothing on the balance sheet with lease payments as expense less a lease inclusion income (see IRS tables) for the S-corp and W2 for the shareholder.
If the lease is basically the same as purchasing (and/or intent to purchase) the vehicle with lease payments the same as financing then you book the asset as owned and depreciate the cost with total payments due as the liability.
If you consider the lease as an operating lease for expense, you should have a footnote to the financial statements disclosing the liability of the S-corp for the lease since there is nothing on the balance sheet.
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