United States

FASB lease standard and the tax treatment of leases

TAX BLOG  | 

With the FASB's February 2016 release of a new standard for the accounting treatment of leases, companies should review the standard and determine the impact on their financial statements.

Though the lease standard generally has an effective date of 2019 for public companies and 2020 for all other entities, many companies have already begun analyzing how the new standard will affect current leases and future decisions on whether to lease or purchase capital items.

This review process also creates an opportunity for companies to review existing agreements for conformity with federal income tax principles. When characterizing an agreement as a true lease for federal income tax purposes, many companies simply follow the GAAP treatment and are unaware that the federal income tax rules differ when determining whether a lease agreement is treated as a sale, a lease or a financing transaction.

Business leaders may be unaware that a change in the GAAP characterization of a lease does not automatically change its characterization for federal income tax purposes. To the extent you have not properly classified an agreement as a sale, lease or financing transaction, you cannot change its tax treatment without obtaining consent from the IRS, and it is often difficult to get consent from the IRS to change the treatment of an existing lease without both parties to the agreement appearing before the IRS.

The release of the GAAP lease standard provides a good opportunity you to review any GAAP to tax lease treatment differences with their advisors, determine best practices and, if necessary, correct the tax treatment of leases on a prospective basis.


Christian Wood

Principal

Christian leads the technical research and analysis for RSM’s accounting methods and periods team nationally. Contact him at christian.wood@rsmus.com.

Areas of focus: Accounting Methods and PeriodsTangible Property Tax Consulting Washington National Tax