MA DOR WILL REQUIRE LEASE REPORTING!
September 9, 2023
Terranova & Associates, LLC strives to keep our clients up to date regarding tax changes that will impact them. Our friends at the Massachusetts Department of Revenue (MADOR) have issued Technical Information Release 23-2 and Accounting Standards Codification 842 that requires Corporations to report leases that have a term of one year or more.
What does this mean to the average Corporation? It depends on whether there business model is to purchase or lease assets. If your business model is to purchase assets, there is no effect. However, if your business model is to lease assets you have substantially more reporting requirements. This new rule is effective on or after December 15, 2021 for Financial Statement reporting and Technical Information Release is dated January 5, 2023.
Pursuant to MA Technical Information Release 23-2:
I. Introduction
The Financial Accounting Standards Board (“FASB”) has updated its accounting standards for leases. For annual financial reporting periods beginning after December 15, 2021, FASB requires privately-held companies and nonprofit organizations to follow Accounting Standard Codification 842 (“ASC 842”), which mandates that all leases with a term longer than one year be capitalized. ASC 842 replaced the previous lease accounting standard, ASC 840, under which certain leases could be classified as “operating leases,” the payments on which could be written off as expenses.
Pursuant to ASC 842, a lease is “[a] contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Control over the use of the identified asset requires “(1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset.” ASC 842 requires lessees to recognize lease assets (the right to control the use of identified property, plant, or equipment for a period of time) and lease liabilities (payments made in consideration for the right to control the use of the asset) for both capital and operating leases with a term over one year on their balance sheets.
The reflection of these leases on corporate balance sheets has raised questions regarding the characterization of such leases as tangible or intangible assets for purposes of the non-income measure of the corporate excise. G.L. c. 63, §39. This Technical Information Release (TIR) explains that leases subject to ASC 842 should be characterized as intangible assets for this purpose.
II. Characterization of Leases as Intangible Property For Corporate Excise Purposes
General Laws c. 63, §39 imposes the Massachusetts corporate excise tax on business corporations. The corporate excise consists of an income measure and a non-income measure. The calculation of the non-income measure differs depending upon whether the corporation is classified as a “tangible property corporation” or an “intangible property corporation.” For a tangible property corporation (defined in G.L. c. 63, §30(10) as a corporation whose tangible property situated in the Commonwealth and not taxed locally is equal to ten percent or greater of its total assets), the non-income measure is based on the book value of the corporation's tangible property situated in the Commonwealth. G.L. c. 63, §30(7). For an intangible property corporation (defined in G.L. c. 63, §30 as a corporation whose tangible property situated in the Commonwealth and not taxed locally is equal to less than ten percent of its total assets), the non-income measure is based on the corporation's net worth. The classification of leases as tangible or intangible property thus may impact whether a business corporation is subject to the property measure or the net worth measure of the corporate excise.
The determination as to whether a corporation is a tangible or intangible property corporation under G.L. c. 63, §30 focuses in part on financial accounting concepts that are based upon Generally Accepted Accounting Principles (“GAAP”). See Eaton Financial Corporation v. Commissioner, Mass. ATB Findings of Fact and Report 2000-526, 536 (July 20, 2000); Web Industries, Inc. & Web Converting, Inc. v. Commissioner, Mass. Mass. ATB Findings of Fact and Report 1999-122 (March 26, 1999). In particular, the Appellate Tax Board (“ATB”) has determined that the Massachusetts Legislature incorporated GAAP concepts into the characterization of an asset as tangible or intangible in §30. Eaton, at Mass. ATB 2000-534. The ATB made this determination in the specific context of the treatment of leases under the non-income measure of the corporate excise. Id. at Mass. ATB 2000-539.
The current GAAP rules indicate that all leases should be considered intangible assets. ASC 842 distinguishes between “right-of-use assets,” which are assets that represent a lessee's right to use an underlying asset for the lease term, and the underlying asset itself, which is the subject of a lease for which a right to use that asset has been conveyed to a lessee. While the underlying asset may be tangible property, it is the right-of-use asset which must be recognized on the lessee's books. [1] Because the right-of-use asset is merely the contractual right to control the underlying asset, it has no physical existence and is itself intangible.
Massachusetts provided Corporate Income Tax: Guidance Issued on Treatment of Leases Under ASC 842 on January 9, 2023:
Massachusetts issued corporate excise tax guidance on the treatment leases under new Accounting Standards Codification 842 (ASC 842). ASC 842 requires lessees to recognize lease assets and lease liabilities for both capital and operating leases with a term over one year on their balance sheets. Taxpayers determining the non-income measure of the Massachusetts corporate excise tax must:
· characterize leases as intangible assets; and
· compute the tax based on the taxpayer's net worth.
As additional information becomes available, we will provide additional updates.
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This is our update as of this time and we will strive to keep you informed; please keep in mind this is a fluid topic and subject to change at any time.
This information should be used to strategically navigate through the months ahead. We are in the office and are happy to assist you.
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Terranova & Associates, LLC.
Thomas D. Terranova, Jr., CPA, PFS, CITP