Table of Contents
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.
|James P. de Bree, Jr.|
UNINTENDED CONSEQUENCES OF THE REPEAL OF § 958(b)(4) AND PROPOSED SOLUTIONS
The Tax Cuts and Jobs Act of 2017 repealed § 958(b)(4) (the Repeal), which prevented a U.S. person from constructively owning stock owned by a non-U.S. person in determining if a corporation is a controlled foreign corporation (CFC). After the Repeal, a U.S. corporation owned by a foreign corporation is considered to own stock in a foreign affiliate owned by the foreign parent. Thus, the foreign affiliate can be considered a CFC of the U.S. subsidiary even if the U.S. subsidiary does not own directly or indirectly any shares in the foreign affiliate. These changes caused unintended negative consequences for foreign multinational corporations with U.S. subsidiaries. Even though some measures have been taken to mitigate these consequences, issues remain. This article discusses problems caused by the Repeal that affect foreign corporations with U.S. subsidiaries and proposes solutions.
ACCOUNTING FOR ADVANCE PAYMENTS IN ACQUISITIVE TRANSACTIONS
Receipt of an advance payment for goods or services generally results in taxation of the income at the time of receipt, but, in some circumstances, income recognition may be deferred. The advance payment also arguably creates a liability that is satisfied upon the recipient fulfilling its contractual obligation to deliver goods or perform services. A great deal of controversy surrounds the tax consequences of the assumption by a buyer of the obligation associated with an advance payment as part of the sale of assets that constitutes a trade or business. First, it is not clear under current authority what the tax consequences of the assumption of that liability by the buyer are. A second issue relates to whether and when the seller and the buyer should recognize income from an advance payment. The character of the obligation related to an advance payment and the tax consequences of transferring the obligation as part of an asset sale of a business are explored in this article. The article concludes that the uncertain tax consequences result from insufficient and inconsistent guidance and proposes alternatives the Department of the Treasury and the Internal Revenue Service should consider for issuing regulations.