Business Tax Quarterly Executive Summary - Fall 2019
November 25, 2019
In this issue, we examine two recent tax and accounting developments that impact businesses across industries. The IRS-proposed guidance on digital content and cloud transactions, and separately, recent updates to lease accounting standards both require companies to reassess accounting practices to ensure accurate tax reporting and compliance. While the proposed guidance, known as REG-130700-14, is not yet official, and ASC 842 is not yet required of non-public companies, businesses should be preparing for their eventual mandate.
Regarding classification of digital and cloud transactions, the proposed rules are a long-overdue update to software regulations issued in 1998, when computer programs were sold on CDs. The proposed regulations not only address cross-border complexities, but also clarify sourcing issues that arise from digital content transfers and revenue reporting and tax implications of cloud transactions when classified as a provision of services versus a lease of property.
Accounting practices for operational leases have changed significantly under the new standards, and public companies were required to implement the new ASC 842 lease accounting rules starting in 2019. As the tax rules have not changed, accounting adjustments creating book-to-tax differences that must be reviewed. Just as with the cloud and digital guidelines, the new lease standard warrants proactive review by businesses sooner rather than later.