ASC 842 new GAAP leasing standard: Tax considerations

The Financial Accounting Standards Board’s (FASB) new standard for leasing (ASC 842) provides significant changes for lease accounting, particularly as it relates to lessees. Public companies are required to implement the new standard on financial statements for periods beginning after Dec. 15, 2018, with nonpublic companies required to implement for periods beginning after Dec. 15, 2021.

The new standard represents a major change in lease accounting. The standard will require all leases to be reported on the balance sheet and may require changes to lease classification and measurement. Many companies are reassessing their lease agreements and implementing new processes to account for leases, with some companies implementing new software systems to track leases. As these changes are being made for financial statement purposes, it’s important to consider the tax impacts.

The new standard doesn’t change the tax accounting methods for leases; there have always been differences between financial and tax accounting rules related to leases. However, as companies develop a new process to track and account for leases on their financial statements, they may need to take a fresh look at tax lease accounting methods, too.

Action items for taxpayers on ASC 842

• Understand your financial accounting changes now. Changes to the financial statement treatment of leases will highlight areas where companies will need to track new book-to-tax differences. Any change to financial reporting should be reviewed for tax purposes.
• Review changes to your lease tracking processes/systems. Many companies will be implementing new processes to track leases under ASC 842. It’s important that historical lease information continue to be tracked for tax purposes. In cases where new software systems are adopted, companies should understand if tax requirements are being addressed within the new system.
• Assess whether any accounting method changes need to be made for tax purposes. Although the tax rules aren’t changing, companies should take a fresh look at lease accounting and identify if historical tax leasing methods are correct. Now is the time to clean up tax leasing methods as companies reassess financial accounting lease methods.

The standard will require all leases to be reported on the balance sheet and may require changes to lease classification and measurement.

How we can help with the new leasing standard

Not sure where to begin? Our team can work with you to identify the proper tax lease classification and accounting. We’ll also assist with implementing new processes to track leases effectively for tax purposes. Additionally, we’ll help you evaluate any changes in methods of accounting and the impact on other tax strategies. Give us a call.