Technical Information Release  TIR 23-2: Accounting for Leases Under ASC 842 for Purposes of the Non-Income Measure of the Corporate Excise

Date:	01/05/2023
Referenced Sources:	Massachusetts General Laws

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. 

 

                                                                        /s/Geoffrey E. Snyder
                                                                        Geoffrey E. Snyder
                                                                        Commissioner of Revenue
 

GES:RHF:mc

January 5, 2023

TIR 23-2

[1] The analysis in this TIR also draws support from the fact that it is possible for a lease to be a liability on the lessee’s balance sheet, if the payments owed under the lease exceed the value of the right to control the property.  Because tangible property cannot be a liability, this further suggests that leases are intangible property.