Advent of Lease Rule Will Lead to Tax Accounting Changes

May 6 — Taxpayers who use much of the same accounting for their taxes as they do their financial report accounting should expect to change their tax-accounting methods when they adopt new financial accounting standards for leasing that take effect in 2018, practitioners and IRS officials told an American Bar Association conference.

John Aramburu and Edward Schwartz, both with Internal Revenue Service's Income Tax and Accounting, agreed with practitioners May 6 at ABA's Section of Taxation conference panel that many taxpayers will continue to account for leases in their tax filings much as they do in their financial report filings. But the change in leasing standards for financial report will bring changes in tax accounting for leasing that the IRS is still assessing.

Recognition, Timing Crucial

Recognition and timing factors will be among the major changes adoption of the leasing standard will bring. The new leasing standard takes effect for reporting periods after Dec. 15, 2018 for public entities, and after Dec. 15, 2019 for all other entities. Aramburu and Schwartz said the IRS is still assessing how these changes unfold. Companies must be careful to monitor the cutoff dates of their leases to know whether they will be eligible for an IRS automatic change in accounting method to accommodate these changes in lease accounting, they said.

EY's Glenn Johnson told the panel that if a taxpayer wants to change its taxation method of accounting for a lease transaction conducted before the beginning of the year of the accounting change, the taxpayer must file a Form 3115, Application for Change in Accounting Method, under the non-automatic changes procedures (12 APPR 07, 4/8/16). However, such changes generally won't be granted unless the taxpayer's proposed accounting method is consistent with that of the counterparty to the lease agreement.

The IRS is also wrestling with how to treat the tax treatment of a lessee who guarantees for the lessor part of the residual value of a lease that might be lost through depreciation, and whether such guarantees ought to be treated as a financing, Aramburu and Schwartz said.

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