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Tax accounting for leases

Navigating unexpected challenges of lease accounting standard

The new lease accounting standard’s focus is, of course, on accounting. But its impacts are not so limited. As US generally accepted accounting principles (GAAP) around leases change, it’s important for CFOs to bring tax leaders to the implementation table so that tax accounting for leases isn’t hindered by new processes and technologies.

Accounting for leases: The tax impact

The new lease accounting standard, ASC 842, has been on the minds of many CFOs in recent months. Compliance is demanding. Implementation is exacting. Systems are complex.

Preparing for day one is naturally a primary objective for nonpublic entities looking ahead at a 2022 implementation. But thinking beyond that first day of new lease accounting processes is equally important.

You might have processes in place to account for all your leases, but those processes will likely have ripple effects throughout your organization that may not be apparent until well after day one. The implications of the new requirements from the tax perspective will likely be among one of the most significant areas of impact.

While US generally accepted accounting principles (GAAP) rules around lease accounting are changing, the rules governing tax accounting for leases are not. Whether a nonpublic entity preparing for implementation or a postadoption public entity facing this challenge on a business-as-usual basis, it’s crucial that an organization’s tax team adapts to new lease accounting systems and develops new processes to perform the same data extraction they did before the new standard.

It is critical for CFOs to bring their tax teams to the table during implementation of the new lease accounting standard. If implementation is already underway without the tax team’s involvement, CFOs may need to push for having well-documented implementation procedures that tax leaders and other stakeholders outside of accounting can effectively leverage. At the same time, the tax leaders within the organization should be ready to communicate their needs in the new environment and how their work can best be accomplished.

New accounting for leases, same tax requirements

The new lease accounting standard has increased visibility into the data used to reflect leases in the financial statements. Even so, companies may find it more challenging to identify and track book-tax differences because the data needed to apply the tax requirements may now be obscured as a result of applying to new lease accounting guidance.

What are the big changes?

  • Because the right-of-use (ROU) asset comprises different components, each with unique tax implications, the traditional change-in-balance approach to identifying book-tax differences may no longer apply.
  • Since certain lease related balances such as initial direct costs and lease incentives are tracked separately for tax reporting purposes, the tax practitioner’s ability to identify each of these relevant components may be more challenging as these balances are collapsed into the ROU asset under the new lease accounting standard.

With the new lease accounting standard comes new processes and software—and new hurdles for tax teams to gather the data they need.

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Many calendar year-end public companies that had to address the new standard in their financial statements for 2019 found it difficult to obtain the information required to maintain certain tax methods. Private companies can learn from these challenges.

Three tax accounting for leases challenges CFOs can expect

To reduce last-minute scrambling and costly mistakes, CFOs should understand key challenges of tax accounting for leases that the new lease standard has created. What does the intersection of new accounting practices and existing tax rules have in store for the finance function? Download our full article for a breakdown of the leading three key areas that may be affected.

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