After many years of delays, the updated accounting standards for recording leases will go into effect. This applies to tax years beginning after December 31, 2021, and will likely have a substantial impact. Currently, most business owners record rent expense for the amount they pay each month on their office and/or other leases. For leases with escalating rent, the expense should be flattened over the period of the lease, while the business carries a net asset or liability for the difference between the amount paid and the consistent monthly expense.
That said, many business owners frequently passed on flattening rent due to the added complexity and frequently trivial impact. Under the new standards, business owners will need to ensure rent is recorded on a straight-line basis and will also need to record an asset for their right to use the property and a liability for the present value of all future payments under the lease. We encourage all clients with debt covenants that involve balance sheet ratios to have a discussion with their bank about the impact of the leasing standards update.
The updated standards are notably complicated, and Raphael and Raphael is always available to help you get a head start on implementation.
While the most notable direct tax implications of the recently passed Inflation Reduction Act only apply to extremely profitable corporations, it also contains several credits that you can take advantage of, including: