How tax reform changes the financial reporting of corporate taxpayers

The Tax Cuts and Jobs Act introduced major tax reform for corporations, partnerships and business owners.

“Everyone is still trying to wrap their heads around the changes and how they’re going to impact their company today and within the next few years,” says Todd Rosenberg, tax managing director at BDO USA, LLP.

Smart Business spoke with Rosenberg about changes that are already impacting financial reporting for corporate taxpayers.

How will tax reform impact corporate taxes?

Significant changes for corporate taxpayers are the reduction to a flat 21 percent income tax rate, repeal of the corporate Alternative Minimum Tax, interest expense limitation, the treatment of net operating losses, changes to the percentage of bonus depreciation and how foreign earnings are subject to U.S. tax. While most changes weren’t effective until Jan. 1, 2018, some items will impact a company’s ASC 740 calculation for financial statements that include the enactment date of Dec. 22, 2017.

What is ASC 740?

ASC 740 — formerly Statement 109: Accounting for Income Taxes or FAS 109 — provides guidance on recognizing income tax expense in financial statement reporting. ASC 740 presents a company’s current income tax liability owed to authorities and reports an asset or liability for the income tax impact of transactions that have occurred. ASC 740 continues to be a risk area within financial statements.

How will financial reporting change?

Changes or updates to the Internal Revenue Code impact a company’s ASC 740 computation and financial statement reporting. As more guidance is released, companies need to gain an understanding of how those changes will impact them.

Some items will impact Dec. 31, 2017, financial statements. For example, calendar year-end companies that issue financial statements as of Dec. 31 must re-measure their deferred taxes using the reduced rate of 21 percent for deferred balances that will be recognized after Dec. 31, 2017. This could greatly increase or decrease the amount of tax expense reported in the financial statements for the period, depending on a company’s deferred tax position. Also, companies with foreign entities that have unremitted earnings will need to assess those earnings and profits to determine if they need to provide for the repatriation tax. Fiscal year-end companies need to reflect these changes in the quarter that includes the enactment date of Dec. 22, 2017.

Further, companies need to look at how tax reform will impact their first quarter. A lot of documentation and analysis may be required. For example, when a company analyzes its need to record a valuation allowance on its deferred tax assets, it will have to consider the changes to the net operating loss (NOL), carry-forward period and utilization limit, or if the company is subject to the interest expense limitation. These two items could create indefinite lived deferred tax assets.

Also, the 100 percent dividend received deduction could impact a company’s foreign source income when considering the utilization of foreign tax credits.

What if companies don’t have the necessary information for their financial statements?

Given the complexity of the changes, the Securities and Exchange Commission issued SAB 118. It provides guidance on the approach companies may use if the necessary information is incomplete or not available when financial statements are issued. Companies will need to work with their tax professionals to follow this guidance correctly, while planning to update statements as soon as possible or as the information is gathered.

Are there other changes to ASC 740 that businesses need to keep an eye on?

The Financial Accounting Standards Board (FASB) was reviewing comments on a proposed Accounting Standard Update (ASU) focusing on the financial statement disclosures framework for ASC 740. Its purpose is to improve the effectiveness of the disclosures that companies provide in financial statements and give clearer communication on information that is important to financial statement users. The FASB will likely focus on this again once the dust settles from tax reform. This framework will impact public and private companies.

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