1. New Financial Reporting Requirements for Leases July 2006: lease topic added to the International Accounting Standards Board (“IASB”) agenda March 2009: IASB and FASB joint discussion paper published Expected 2 nd Quarter 2010: Exposure draft of new lease accounting standard Expected 2 nd Quarter of 2011: Final standard issued (with implementation date guidance)

2. New Financial Reporting Requirements for Leases Purpose: – Create a common standard which would ensure that all assets and liabilities resulting from lease contracts are recognized on the balance sheet – Eliminate the possibility of similar transactions being reported in very different manners (structuring capital leases so they meet the bright- line tests to be considered operating leases) – Enhance the comparability of financial statements – Enhance the transparency of an entity’s financing activities

3. Capital v. Operating Leases Criteria for classification of capital lease (Lessee): – Must be non-cancelable and meet one or more of the following four criteria: The lease transfers ownership of the property to the lessee. The lease contains a bargain purchase option The lease term is equal to 75% or more of the estimated economic life of the leased property The present value of the minimum lease rental payments equals or exceeds 90% of the fair value of the leased property – All others are treated as operating leases

4. Capital v. Operating Leases Advantages of Capital Leases: – Allow for the following accelerated tax depreciation deductions Accelerated depreciation under MACRS Potential for §179 depreciation – Tax deductions can come before cash is required to pay for the lease

5. Capital v. Operating Leases Example: – Leased copier / 5 year term / 2.8% imputed interest rate / $500 per month lease Lease deductions (assuming no §179 deduction): OperatingCapital Year 1 6,000 6,255 Year 2 6,000 9,527 Year 3 6,000 5,794 Year 4 6,000 3,487 Year 5 6,000 4,937 30,000

6. 4401 Dominion Boulevard, 2 nd Floor Glen Allen, Virginia 804-747-0000 www.kshgs.com Questions? Robert A. “Ted” Gary, IV, CPA.CITP, Principal tgary@kshgs.com | 804-273-6203 Jacob D. Favaro, CPA, CFP®, Senior Tax Manager jfavaro@kshgs.com | 804-418-6267 Keiter Stephens CPAs IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction(s) or tax related matter(s) addressed herein. Portions of this presentation courtesy of Williams Mullen’s Richmond Tax Forum Spring 2010