13.3 Income Taxes

A lease’s classification for accounting purposes does not affect its classification for tax purposes. Thus, an entity needs 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. Entities therefore will need to establish a process (or leverage its existing processes) to account for these differences.

Under ASC 842, the lessee recognizes in its statement of financial position an ROU asset and a lease liability for most operating leases (including those related to synthetic lease arrangements). For income tax purposes, however, the lessor is still treated as the owner of the property, resulting in temporary differences with respect to each individual item and the need to record and track the deferred taxes on each temporary difference separately.

For example, if there is no tax basis in the ROU asset, a taxable temporary difference may arise. Similarly, if there is no tax basis in the lease liability, a deductible temporary difference may arise. The taxable and deductible temporary differences are separate and give rise to separate and distinct deferred tax amounts that generally should not be netted in the income tax disclosures. Entities should carefully consider the disclosure requirements in both ASC 740-10-50-2 and ASC 740-10-50-6.

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 Deloitte’s Roadmap Income Taxes for additional considerations.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.