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How the Variable Interest Entity Proposal Could Benefit Businesses

  Arthur F. Rothberg, Managing Director, CFO Edge, LLC  
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  Article Summary  
For years, business leaders have used a simple strategy to save on taxes: creation of a separate company to purchase the real estate and then lease it to the operating company.

The separate company is known as a variable interest entity (VIE), or a company where the controlling financial interest is not established based on a majority of voting rights.

By recognizing losses primarily generated by depreciation on their tax returns, owners are able to save on taxes. The primary disadvantage is the operating company - rather than the VIE - must guarantee the mortgage. This adds a new asset and liability to the operating company's books.

There is now some good news: the Private Company Council (PCC) released a proposal that would exempt many private companies from applying strict consolidation guidance under U.S. generally accepted accounting principles (GAAP) for VIEs to leasing companies that are under common control. The disadvantage noted above would be eliminated.

This article reviews the PCC VIE proposal along with two other private company exemptions and two additional proposals under consideration.

Owners and executives may want to consider talking with a provider of outsourced CFO services who is experienced in VIE accounting and determining potential benefits.

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