A lot of the things that businesses need, like office space, tools, vehicles, and warehouses, are leased. But even though the monthly payment might seem simple, lease responsibilities are more complicated than they seem. Not understanding them can cause extra costs, problems with compliance, or missed chances to save money on taxes.
In fact, Deloitte found in 2023 that more than half of private companies were still having trouble implementing the ASC 842 lease accounting standard. This has big effects on how leases show up on financial statements.
Entrepreneurs and small business owners can make better budgets and decisions if they understand how lease responsibilities work, especially with the new ASC 842 rules in place.
What Is ASC 842 and Why It Matters
Operating leases weren’t shown on the balance sheet under the old rules (ASC 840). That’s changed. Most leases now require firms to recognize both assets and liabilities. This implies that it can have a big impact on how investors, lenders, and auditors see your financials, even if you’re only renting a copier or a storefront.
Review ASC 842, which outlines the revised rules and what companies must disclose, to gain a better understanding of how this change operates.
Understanding ASC 842 isn’t just about ticking boxes—it can help you:
- Forecast cash flow more accurately
- Negotiate lease terms more effectively
- Avoid last-minute accounting surprises
- Strengthen your position when applying for loans
Hidden Costs and Clauses to Watch Out For
Beyond accounting standards, lease contracts themselves can carry surprises. Business owners often sign long-term leases without realizing the financial obligations they’ve committed to. Many lease agreements include automatic renewal clauses, maintenance costs, or escalation clauses that raise rent annually.
Be cautious of:
- Triple-net leases, which pass on property taxes and insurance
- Early termination fees
- Personal guarantees, making owners personally liable
- Market-rate rent adjustments in multi-year contracts
- Fit-out costs that might not be reimbursed by the landlord
Have your lease reviewed by a commercial real estate attorney before signing to avoid complications, particularly if you’re committing to a long-term agreement.
Is It Better to Buy or Lease?
A frequently asked question by business owners is whether to purchase or lease. Flexibility, lower upfront expenses, and improved cash flow are all possible with leasing. However, purchasing might eventually provide superior value, especially for automobiles or equipment that appreciate in value over time.
Ask yourself:
- How long will you need the asset?
- Will technology changes make it obsolete soon?
- Can you afford the upfront investment to buy?
- What tax deductions are available for leased vs. owned assets?
Crunching the numbers with your accountant can clarify the better route—and now, thanks to ASC 842, leased assets show up on the balance sheet similarly to owned ones, further leveling the field in decision-making.
Tools That Help You Stay on Top of It
Managing multiple leases manually gets complicated fast. That’s why many businesses turn to lease accounting software to track terms, deadlines, and compliance. These platforms help avoid late payments, missed renewals, or errors that could throw off your financials.
Look for features like:
- Alerts for critical dates
- Integration with your accounting system
- Automatic ASC 842 compliance
- Forecasting tools for budgeting
Investing in the right tools can streamline financial planning and keep your team focused on growth instead of paperwork.
Final Thoughts
Lease obligations are often treated like background noise—but they shouldn’t be. A few percentage points on rent or a misread contract clause can add up to thousands lost over time. Understanding what you’re committing to—especially under evolving standards like ASC 842—empowers you to negotiate better deals, protect your cash flow, and plan with confidence.
Smart leasing isn’t just a cost-cutting measure. It’s a strategy for building a more transparent, resilient, and financially healthy business.