The new lease accounting standard ASC 842 treats U.S. federal income taxes the same as the previous standard, ASC 840, however the increase in assets and liabilities added to the balance sheet could change several areas of the tax function.
Here is a summary of the key considerations of tax impact with ASC 842:
Operating & Finance Leases: With the new lease accounting standard, entities must record additional assets and liabilities on financial statements and determine if a lease is a true tax lease or a non-tax lease. A true tax lease is much like the previous U.S. Generally Accepted Accounting Principles (GAAP) operating lease, in that the asset and related deductions are maintained by the lessor, while the lessee deducts rent. A non-tax lease is much like GAAP’s old capital lease standard with the lessor recognizing the interest income and the lessee recognizes the deductions for depreciation and interest portion of payments.
Deferred Taxes: Under U.S. GAAP operating standards, once the new lease accounting standard has been adopted, leases might change in value as the lease asset and lease liability are brought onto the balance sheet. U.S. Tax Code does not change the value of the asset, however, which means it leaves the income tax treatment unchanged. The result is an assessment for deferred taxes.
How deferred tax assets and liabilities are impacted:
The new lease accounting standard requires a lessee to record all right-of-use (ROU) assets and liabilities for each lease even though they have no tax basis. These assets are then recorded in the financial statements as temporary differences.
State and Local Taxes: States collect either property taxes or franchise taxes. Under the new lease accounting standard which type they collect may have changed. Also, state and local taxes include property and rent payments as income. Under the new lease accounting standard this could change the state income tax rate and the measurement of deferred tax assets and liabilities.
New process methods: Tracking data accurately might require changing process and possibly impact international taxes as well as the following U.S. tax accounting method items: timing of income or expense in IRC section 467, characterization of leases (finance, lease and sale); and the treatment of lease acquisition costs and tenant improvements.
Learn more about how lease accounting software integrates with corporate accounting systems and helps perform ongoing lease management such as adjusting indexed rents and related taxes, classifying leases for new lease accounting requirements, calculating percentage rent obligations, generates journal entries, runs financial reports and more.