ASC 842 Lease Accounting: 8 Strategies to Minimize Tax Exposure for Private Companies

Tax Reduction Strategies under ASC 842 Lease Accounting

Implementing the ASC 842 lease accounting standard can be complex, and it's essential for private companies to understand its implications and potential strategies to minimize tax exposure.  We have outlined key strategic initiatives that should be considered to potentially reduce your corporate tax exposure.

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1. Lease vs. Buy Analysis:

• Implication: Under ASC 842, leasing assets could result in a higher reported liability on our balance sheet.


• Initiative: We should conduct a comprehensive 'Lease vs. Buy' analysis for significant asset acquisitions. In cases where the financial benefits of ownership outweigh those of leasing, considering an outright purchase might be more tax-efficient and may avoid increased liabilities on our balance sheet.

2. Re-evaluation of Lease Terms:

• Implication: Longer lease terms can result in a higher lease liability.


• Initiative: We should re-evaluate our leasing agreements to consider shorter lease terms or include options to terminate early. This can potentially lower the present value of future lease payments, reducing the lease liability.

3. Negotiate Favorable Lease Contracts:

• Implication: Variable lease payments based on usage or performance are excluded from the lease liability.


• Initiative: Negotiate lease agreements with variable payment structures based on the usage of the asset or other performance metrics, rather than fixed payments. This can help in reducing the total lease liability recognized.

4. Effective Utilization of Incremental Borrowing Rate (IBR):

• Implication: The discount rate used to calculate the present value of lease payments impacts the lease liability.


• Initiative: Ensure an accurate determination of our company's IBR, reflecting our creditworthiness and the current economic environment. If the implicit rate in the lease is not readily determinable, using a well-determined IBR can impact the lease liability amount.

5. Timely Recognition and Measurement of Lease Modifications:

• Implication: Lease modifications can change the lease term or the consideration for the lease, impacting lease liability and potentially our tax exposure.


• Initiative: Regularly review and monitor lease agreements for any modifications and ensure they are timely recognized and measured as per ASC 842.

6. Sublease Considerations:

• Implication: Subleasing can change the lease classification and related accounting.


• Initiative: For any unused assets, consider subleasing as an option. Ensure that the sublease agreements are structured in a manner that's tax and accounting-efficient.

7. Training and Education:

• Implication: Misunderstandings or misapplications of ASC 842 can lead to unintentional tax exposures.


• Initiative: Invest in regular training for our finance and accounting teams to ensure a thorough understanding and correct application of the ASC 842 standard.

8. Engage Tax Experts and Advisors:

• Implication: The nuances of ASC 842 and its interplay with tax regulations can be intricate.


• Initiative: Engage external tax experts and advisors to review our lease accounting practices and provide recommendations tailored to our specific business needs and industry.

In summary, while the ASC 842 lease accounting standard introduces new challenges for our company, proactive management and strategic initiatives can help us mitigate potential tax exposures. It's essential to remain agile, informed, and ready to adapt to ensure our financial reporting is both compliant and optimized for tax efficiency.

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