ILMA Compoundings - March 2020 - 33

adjusting entry, and the change to
a new approach may require filing
a tax accounting method change
with the IRS.
*	 Tax accounting. Lessees must
better understand which leases
are true tax leases and which are
loans for tax purposes. Previously, most operating leases were
considered tax leases. Now lessees
must be sure to (1) properly characterize the lease and (2) separate
tax-deductible interest expense
(which may also be limited by
the new tax laws) from imputed
nontax-deductible interest (in
which case lessees would deduct
the rents accrued to be paid).
*	 Migration accounting issues.
Assuming lessees were properly
recording their operating leases
before the transition, some items
that were on their balance sheet
(when rents paid differs from rent
expense accrued - for example,
when a lease has a three-month
rent holiday), must be rolled into
the new Right of Use (ROU) asset.
Also, for lessees with deferred
book gains - for instance, from
prior sale leasebacks - the deferred gain balance flows directly
to equity on implementation;
previously, they were amortized
as a reduction against current rent
expense. So, the lessee will see an
increase in rent expense although
nothing changed with the lease,
only the implementation of the
new standard.

BENEFITS OF LEASING REMAIN
For the nearly 8 out of 10 U.S. businesses that finance their equipment
acquisitions, the reasons why they do
so remain intact under ASC 842:
*	 Tax management. Leasing allows
lessees to more efficiently manage
some of their taxes; when they
cannot utilize all the deductions,
the lessors can and are able to
pass the benefits through via
lower rates. Leasing also shifts the
risk of future tax-rate increases
to the lessor. The Tax Cuts and
Jobs Act of 2017 makes tax
leasing even more important than
previously.
*	 Finance 100%. Arrange 100%
financing of equipment, software
and services with 0% down payment while often still recording less
than 100% on your balance sheet.
*	 Keep up to date and avoid residual value risk. Keep current with
technology by acquiring more and
better equipment more frequently
compared to loan financing, and
avoid residual risk (because the
lessor assumes that risk).
*	 Improved ROI/ROA compared
to a loan. Rather than capitalizing
100% of an asset, a capitalized
lease is generally reported at a
lesser amount.
*	 Cash-flow management. Make
smaller, more manageable and
flexible payments while the
equipment generates revenue.

*	 Benefit from bundling. Bundle
the equipment, installation,
maintenance and more into a
single, easy-to-manage solution.
*	 Preserve cash and bank credit
lines. Preserve available and often
limited cash resources for other
areas of the business, such as expansion, improvements, marketing or
research and development.
*	 Outsource asset management.
The equipment financing company can manage an organization's
equipment from delivery to disposal. A user no longer needs to
figure out how to resell an asset.
*	 Customize terms. Set customized
payments to match cash flow and
even seasonal income fluctuations.
*	 Hedge against inflation. Lock in
rates with a lease to avoid future
inflation.
It's important to check with a
professional tax adviser or accountant who can address your business's
particular situation. With adequate
information and additional time
to implement ASC 842, lessees can
continue to reap the advantages
of financing.
Petta is president and CEO
of the Equipment Leasing and
Finance Association (ELFA),
the trade association that
represents companies in the equipment finance
sector, which includes financial services
companies and manufacturers engaged in
financing capital goods.

33
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