The recent changes in lease accounting standards have not only transformed the way companies report their financials but have also brought significant tax implications. The new guidelines, such as the Financial Accounting Standards Board's (FASB) ASC 842 and the International Financial Reporting Standard's (IFRS) IFRS 16, aim to improve transparency and comparability of financial statements. In this article, we will explore the tax implications that businesses need to consider in light of these lease accounting changes.

Recognition of Lease Assets and Liabilities: Under the previous accounting standards, operating leases were not required to be recognized on the balance sheet, which had certain tax benefits. However, with the implementation of ASC 842 and IFRS 16, companies are now required to recognize lease assets and liabilities, resulting in changes to tax planning strategies.

1. Depreciation and Amortization: The recognition of lease assets also affects the depreciation and amortization deductions for tax purposes. Previously, operating leases did not involve capitalization and depreciation of leased assets. However, under the new standards, lease assets are treated similarly to owned assets, impacting the tax depreciation schedules and deductions.

2. State and Local Tax Considerations: Companies should also consider the potential implications of lease accounting changes on state and local taxes. Different jurisdictions may have varying rules and tax treatments related to lease transactions. It is crucial for businesses to understand the specific tax laws and regulations in each jurisdiction where they operate to ensure compliance and avoid unexpected tax liabilities.

3. Impact on Tax Planning Strategies: The changes in lease accounting can influence tax planning strategies. Companies may need to review and modify their existing tax planning structures to align with the new accounting standards. For example, businesses may choose to renegotiate lease terms or explore alternative financing options to optimize their tax positions.

Transfer Pricing Considerations: For multinational companies, lease accounting changes may have transfer pricing implications. Transfer pricing refers to the pricing of transactions between related entities in different tax jurisdictions. As leases are now recognized on the balance sheet, it may impact the determination of arm's length pricing and require adjustments to ensure compliance with transfer pricing regulations.

If you have any questions on the tax implications of lease accounting please contact David Porter.