Your operating company rents its warehouse from an LLC you also own. There was never a formal lease — just a monthly transfer you have made for years, an amount you picked to cover the mortgage plus a little extra. Then your auditor asks a question that stops you cold: what is the legally enforceable lease term? Under ASC 842, that phrase decides whether you book a lease at all, how you classify it, and how big the right-of-use asset and liability on your balance sheet become. And for an arrangement sealed with a handshake between two companies you control, "legally enforceable" is genuinely hard to answer — hard enough that many private companies paid lawyers to draft arm's-length-style contracts for leases where both signatures were their own.
In March 2023, FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements, with two fixes aimed squarely at this situation. First, private companies can elect, lease by lease, to treat the written terms of a common-control arrangement as legally enforceable even when they are not — a signed memo beats a law-firm engagement. Second, leasehold improvements in common-control leases are now amortized over their useful life to the group instead of the shorter lease term, ending the absurdity of writing off a ten-year build-out over a one-year handshake lease. This guide walks through both changes, who each one covers, and what to do if you rent from your own LLC.
Why Related-Party Leases Broke Under ASC 842
Common-control structures are everywhere in private business: the operating company leases its building from a real estate LLC owned by the same shareholders, a medical practice rents its suites from a property company the same physicians own, a contractor's equipment lives in a yard titled to a sister entity. The motives are sensible — liability protection, estate planning, cleaner financing — and the paperwork is usually thin, because nobody negotiates hard with themselves.
The old lease standard, ASC 840, handled this gracefully: related-party leases were accounted for based on their economic substance. If you were paying for the use of an asset, a lease was in place, regardless of legal documentation. ASC 842 changed the rule. Paragraph 842-10-55-12 requires related-party leases to be classified and accounted for on the basis of the legally enforceable terms and conditions, exactly like leases between strangers. The economics did not matter; the enforceable paper did.
For documented third-party leases, that change was fine. For common-control arrangements, it created three practical problems. Many have no written agreement at all, so determining what is "legally enforceable" becomes a legal research project over an unwritten deal. Many that do have paper use terms nobody would enforce — a one-year term that has rolled over silently for a decade, rent that drifts with the mortgage. And the lease term this analysis produces then feeds everything else: whether a lease exists, its classification, the size of the balance-sheet gross-up, and the amortization period for any leasehold improvements.
One scope note before the fixes. FASB never defined "common control" in the standard; in practice, entities look to SEC guidance, under which entities with 50 percent or more of the voting ownership held by the same individual, enterprise, shareholder group, or family members are deemed under common control. And the categories nest: every common-control lease is a related-party lease, but not every related-party lease is a common-control lease. A lease with your brother-in-law's company may be related-party without being common-control — and ASU 2023-01 only helps with the common-control kind.
Fix 1: The Written-Terms Practical Expedient
The headline relief is a practical expedient available to private companies and not-for-profit entities that are not conduit bond obligors — in plain terms, entities that do not answer to public investors. If you qualify, you may elect to use the written terms and conditions of a common-control arrangement as the legally enforceable terms, without considering whether a court would actually enforce them.
Three features of the election matter most.
It is lease by lease, not all or nothing. The expedient is elected on an arrangement-by-arrangement basis. You can use it for the warehouse lease with your property LLC while doing the full legal analysis for a different arrangement — perhaps one where the written terms are stale and the real deal has moved on. Document which arrangements use the expedient and which do not, because your auditor will ask, and because the answer should be stable year to year unless the facts changed.
Written means written — but a memo counts. The expedient applies the terms you can point to on paper: the rent, the dates, the renewal options, as written. FASB staff guidance and practitioner consensus agree the writing does not need to be a formal lease agreement drafted by counsel; the two parties can agree on dates and payment information in any documented form. What it cannot do is conjure terms from thin air: if nothing is written down, the expedient is unavailable and you fall back to determining what is legally enforceable, unwritten terms and all. Critically, you are permitted to document existing unwritten terms before your financial statements are available to be issued — so if your lease with your own LLC lives entirely in your head and your bank history, writing it down now still counts.
You do not look beyond the paper. When you apply the expedient, you take the written terms at face value. You do not need to evaluate whether side understandings, renewal patterns, or economic incentives imply different terms. That is the whole point: the analysis collapses from a legal opinion to a reading exercise.
Transition is forgiving. If you had already adopted ASC 842 when ASU 2023-01 arrived, you apply the expedient either prospectively to leases commencing on or after your adoption date, or retrospectively to the beginning of the earliest period presented. If you had not yet adopted ASC 842, you adopt both together under the standard transition guidance. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods, with early adoption permitted — so by now the expedient should be live in your policy elections, not sitting in a to-read pile.
Fix 2: Leasehold Improvements Amortized Over Their Useful Life
The second fix solves the ugliest consequence of the old rule, and unlike the first one, it applies to every entity — public companies included.
Under both ASC 840 and original ASC 842, a lessee amortized its leasehold improvements over the shorter of the remaining lease term or the improvements' useful life. In a common-control setting, that rule routinely produced nonsense. Picture the operating company spending 150,000 dollars fitting out a warehouse it rents month-to-month from its sister LLC. The improvements will serve the group for ten years — when this "lease" ends, another group member still owns the building and the business still operates from it. But the legally enforceable term is one month, so the old rule demanded amortizing 150,000 dollars over roughly no time at all, vaporizing the asset the moment it was capitalized.
ASU 2023-01, codified at ASC 842-20-35-12A, replaces that outcome: leasehold improvements in a common-control lease are amortized over the useful life of the improvements to the common control group, as long as the lessee controls the use of the underlying asset through a lease. The ten-year build-out gets ten years of amortization. The accounting finally matches the economics both parties always understood.
Two mechanics come with the new rule. First, if the lessee later gives up control of the underlying asset — the operating company moves out, the building is sold outside the group — the remaining unamortized balance transfers to the lessor and is accounted for as a transfer of assets between entities under common control, recorded through equity for a for-profit company. It is not an impairment, not a loss, not a write-off: it is moving value from one pocket to another within the same ownership. Second, lessees must disclose leases in which improvements are being amortized over a period longer than the lease term, so a reader of the statements can see where the balance sheet carries improvements that outlive the paper lease.
Transition offers three paths: prospectively to new improvements only; prospectively to new and existing improvements, with existing unamortized balances spread over their remaining useful life as of the adoption date; or retrospectively to the beginning of the earliest period presented, with improvements that would not yet have been fully amortized picked up through a cumulative-effect adjustment to opening retained earnings. Most private companies with existing build-outs will want the second or third path — the first leaves the old, too-fast amortization running on everything already capitalized.
What This Means If You Rent From Your Own LLC
Translate the standard into a checklist for the most common fact pattern: your operating company pays rent to a property entity under the same control.
Step 1: Write the lease down. Put the term, the rent, who pays taxes and maintenance, and any renewal options in a signed document both entities keep. It does not need to be long or lawyered, but it needs to exist before your statements are issued — no writing, no expedient. Date it, have both sides sign in their entity capacities, and file it where next year's audit team can find it.
Step 2: Account for it like a third-party lease. Once the written terms are your enforceable terms, the rest of ASC 842 runs normally: determine whether the arrangement is or contains a lease, classify it as operating or finance using the same criteria as any other lease, and record the right-of-use asset and lease liability. The expedient simplifies step zero — what the terms are — not the lease accounting itself.
Step 3: Fix your improvement amortization. If you previously wrote off build-outs over a short lease term, revisit the schedule under the new rule and pick a transition path. Going forward, capitalize improvements and amortize over their useful life to the group, and add the required disclosure when that life exceeds the lease term.
The journal entries themselves are ordinary lease accounting; the common-control part is deciding which numbers feed them. In a plain-text ledger, the month-end picture for a 5,000-dollar monthly payment on the warehouse lease plus amortization of a 150,000-dollar build-out over its ten-year life looks like this:
2024-01-31 * "January rent on warehouse leased from sister LLC"
Expenses:Rent:Warehouse 5,000.00 USD
Assets:Cash:Checking -5,000.00 USD
2024-01-31 * "Amortize build-out over 10-year useful life, not the 1-year paper term"
Expenses:Amortization:Leasehold-Improvements 1,250.00 USD
Assets:Leasehold-Improvements -1,250.00 USDThe second entry is where ASU 2023-01 shows up in your books: 1,250 dollars a month for ten years, instead of 12,500 dollars a month for one year under the old shorter-of rule. Separate the improvement amortization from the rent in your chart of accounts — commingling them hides the disclosure your statements now require and makes the equity transfer, if you ever move out, much harder to compute.
Mistakes That Still Catch Private Companies
Assuming the expedient covers everyone. The written-terms election is private-company relief. If any entity in your structure is a public business entity, a conduit bond obligor, or an SEC-filing benefit plan, it cannot use Fix 1 — though it still gets Fix 2, the leasehold improvement rule, which has no such restriction. Groups straddling the line need to track which entity uses which treatment.
Electing the expedient with nothing in writing. This is the single most common failure: treating the ASU as permission to keep the handshake deal and skip the analysis. The expedient replaces legal enforceability with written terms; unwritten terms give it nothing to work with. The fix is cheap — document the arrangement — but it must happen before the statements go out.
Forgetting the disclosure. The leasehold improvement change comes with a disclosure obligation for improvements amortized beyond the lease term. Footnote discipline is unglamorous, but an auditor testing ASU 2023-01 adoption will look for exactly this sentence, and its absence reads as incomplete adoption.
Booking the end-of-control transfer as a loss. When the lessee stops controlling the asset, the leftover improvement balance moves to the lessor through equity — for-profit entities record it as an adjustment to equity, not through the income statement. Running it through profit and loss misstates earnings and mishandles what is, in substance, a capital transaction between commonly controlled entities.
Confusing book treatment with tax treatment. Nothing in ASU 2023-01 changes how the IRS sees your rent, your improvements, or your related-party transactions — depreciation lives under the tax code, self-rental rules still apply to passive activity grouping, and rent must still be reasonable to survive scrutiny. Keep two mental ledgers: GAAP tells your lenders and investors what happened, the tax code tells the IRS what is deductible, and the two were never the same.
Letting elections drift. Because the expedient is per-arrangement, it is easy for year two to quietly contradict year one — the expedient applied, then forgotten, then half-applied to a renewed lease with different written terms. Put the election in your accounting policy memo alongside the list of covered arrangements, and revisit it whenever a lease renews or an entity enters or leaves the group.
Your Next Move
Pull every lease between entities you control and sort them into two piles: written and unwritten. For the written pile, elect the practical expedient arrangement by arrangement, run the normal ASC 842 accounting off the paper terms, and re-set improvement amortization to useful life with the required disclosure. For the unwritten pile, write the terms down now — term, rent, renewals, responsibilities — signed by both sides before your statements are issued, and the pile becomes the first pile. The standard did the hard part by accepting your memo as the answer; the only remaining job is having a memo.
