Recent developments have made lease tax accounting more complex

Recent accounting and tax developments have increased the tax accounting complexities for both lessees and lessors. ASU 2016-02 (subsequently codified as ASC 842), issued in 2016 by the Financial Accounting Standards Board, made substantial modifications to lease accounting under generally accepted accounting principles (GAAP), which have been widely adopted. While the Internal Revenue Code has not incorporated the GAAP changes, the Tax Cuts and Jobs Act of 2017 made substantive changes that can affect lease accounting for tax purposes. Little has been written about the interplay between the modified GAAP rules and the accounting treatment for tax purposes. Consequently, many tax practitioners are unprepared to properly account for the GAAP and tax accounting differences after the ASC 842 regime is implemented. This article explores aspects of lease accounting for operating leases from both a GAAP and tax perspective. For lessees and lessors, the GAAP changes affecting operating leases are analyzed, followed by a discussion of the operative tax rules.