13.3 Income Taxes
A lease’s classification for accounting purposes does not affect its classification for tax purposes. An entity will therefore continue to be required to determine the tax classification of a lease under the applicable tax laws. While the classification may be similar for either purpose, the differences between tax and accounting principles and guidance often result in book/tax differences. Thus, once an entity implements ASU 2016-02, it will need to establish a process (or leverage its existing processes) to account for these differences.
Connecting the Dots
Potential for Additional Deferred Tax Assets and Liabilities
ASC 842 does not significantly affect the accounting for income taxes under ASC
740. In a manner consistent with ASC 840,
differences between accounting and tax guidance
will result in book/tax differences. Because the
lessee will recognize a new ROU asset and lease
liability for operating leases as a result of
adopting ASC 842, there may be more book/tax
differences under ASC 842 than under ASC 840.
Because ASC 842 requires entities to reevaluate their leases, they may have the opportunity to reassess the tax treatment of such leases as well as their data collection and processes. Since the IRS considers a taxpayer’s tax treatment of leases to be a method of accounting, an entity may need to obtain IRS consent if it makes any changes to its existing methods.
Entities should also consider the potential state tax issues that may arise as a result of ASC 842, including how the classification of the ROU asset may affect the apportionment formula in the determination of state taxable income and how the significant increase in recorded lease assets could affect the determination of franchise tax payable.
Since the potential tax implications are many and varied, it is essential for a company’s tax department to be involved in the evaluation of the impact of ASC 842 as well as in discussions related to policy adoption and system modifications. See Appendix D for additional implementation considerations.