New Lease Standards ASC 842: How Tax Accounting for Leases Change?

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Since the release of new lease standards, ASC 842, companies and their respective heads have been brainstorming ways to ease the compliance process, complex systems and work out implementation strategies that bring the best results and maximum productivity.

In the current year 2021, millions of non-public companies will be getting prepared for new lease standard implementation in 2022 as FASB approved the extension of the implementation date in May 2020. While it is true that the new standards will impact accounting the most, it will reverberate across the spectrum of financial management activities. And it will include tax accounting too.

So, how will tax accounting for leases change?

It is important to note that US GAAP – United States Generally Accepted Accounting rules does not affect or change the tax accounting principles for leases. But at the same time, the company managers looking after tax needs to learn and adapt to new lease accounting systems.

To achieve this goal, the project leaders should encourage the participation of the tax team in the new lease standards implementation process. Else, proper documentation, elaborating and explaining the implementation procedures should be made available for the tax team. Additionally, the tax accounting team will face certain challenges which need to be communicated and addressed consistently by the competent authorities.

New lease accounting standards aim to increase transparency by boosting data visibility of leases for financial statement users. But as a result, companies will find it difficult to keep a tab on tax differences as data will be hidden due to new standards.

Also, Right-of-use-asset consists of several components which have different tax implications. Therefore, the traditional approach of change-in-balance to find book-tax differences will not apply anymore. Besides, other factors like initial direct costs and lease incentives, which are part of tax reporting, will be more challenging to identify due to new lease standards.

Many public companies who implemented the new lease accounting standards conveyed that it was difficult for the tax team to find data for different tax methods. As new processes and systems are used, obtaining information regarding the same has become a tedious task.

More Challenges Expected

Tax Balances

The deferred tax asset and liability balances need to be adjusted due to the implementation of new lease standards. It was true in the case of public companies. One of the biggest challenges is that the book value of ROU assets recorded and lease liabilities to record different balances created, can not be used.

Tax Accounting

The new lease standards have exposed different tax accounting methods, used by taxpayers, which are not permissible. This approach needs change in the future. It has forced tax departments to assess the legacy lease accounting methods which are in existence now.

Also, the tax team must consider new data and analyze if a new methodology will be required for tax accounting.

Using lease accounting software will help businesses to process taxes automatically. Moreover, it will provide the tax team with all the necessary data required to use different tax methods. Yardi Corom is one of the best lease accounting and lease management software solutions in the market. It assists businesses by simplifying ASC 842 calculations and implementation. Visit www.yardicorom.com for more details.