by Elissa Posway, Shareholder, Doeren Mayhew CPAs and Advisors

Tax reform not only brought sweeping changes to the U.S. tax code, but also impacts financial reporting for organizations filing as a C corporation, since they most likely have deferred tax assets or liabilities on their balance sheets. As a result of implementation concerns raised by stakeholders, the Financial Accounting Standards Board (FASB) has issued guidance to help with properly accounting for the financial statement impact of tax reform.

Below are some of the key areas that might impact your company:

Change in Tax Law or Rates.  FASB ASC 740 requires deferred tax assets and liabilities be recognized at the tax rate expected to be in effect at the time the deferred tax asset or liability is expected to be realized or settled. With the change in the corporate tax rate from 35 percent to 21 percent for years beginning after Dec. 31, 2017, this means that adjustments to the deferred amounts will be required to reflect the lower tax rate and the ability to fully utilize net operating losses in the future needs to be assessed in light of the lower tax rate. These adjustments should be reported within income from continuing operations as part of income tax expense. The amount of the adjustment related to the newly enacted tax rate must be disclosed in the notes to the financial statements.

Tax Liability of Deemed Repatriation. The new tax law imposes a one-time transition tax on undistributed and previously untaxed post-1986 foreign earnings and profits. This transition tax is referred to as the toll tax and it can be paid over eight years, on an interest-free basis. If the toll tax will be paid in installments, the liability should be appropriately split between current and noncurrent on a classified balance sheet. The FASB has issued guidance stating the toll tax liability should not be discounted for financial statement presentation.

Alternative Minimum Tax (AMT) Credits that Become Refundable. With the elimination of AMT for corporations, the new law encourages organizations to use any existing AMT credit carryforwards to reduce tax obligations from 2018 through 2020. Additionally, any AMT credit carryforwards not used to reduce taxes are eligible for a 50 percent refund over the next three years and a 100 percent refund in 2021. Because of these changes, any valuation allowances that may have been established for the AMT carryforwards should be reversed. In addition, the FASB has stated  the AMT carryforwards, whether a deferred tax asset or a receivable, should not be discounted for financial statement presentation.

Accounting for Base-Erosion and Anti-Abuse Tax (BEAT). The BEAT calculation eliminates the deduction of certain payments made to foreign companies, but applies a lower tax rate on the resulting BEAT income. Entities must now pay a BEAT if it is greater than its regular tax liability under the new law. The FASB has issued guidance stating deferred tax amounts related to BEAT should be measured at the statutory rate of the regular tax system rather than at the lower BEAT tax rate.

Private and Non-Profits Applying for SAB No. 118.  FASB ASC 740 does not cover situations where the accounting for income tax effects of a change in tax laws is not fully assessed at the time the financial statements are issued. This led the Securities and Exchange Commission (SEC) to issue Staff Accounting Bulletin (SAB) No. 118 which follows a “measurement period approach.” The FASB has indicated private companies and non-profit entities can follow the guidance issued under SAB 118 provided all relevant aspects of SAB No. 118 are applied in their entirety, including the required disclosures, and the accounting policies disclose that SAS No. 118 has been applied.

Additionally, the FASB addressed certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the new tax law. Financial statement preparers have the option to reclassify stranded tax effects within AOCI to retained earnings in each period where the effect of the new corporate tax rate is recorded and must disclose a description of the accounting policy for releasing income tax effects, whether they elect to reclassify the stranded income tax effects from the new tax law and information about the other income tax effects reclassified. These amendments are effective for all organizations for fiscal years beginning after Dec. 15, 2018, and interim periods within those fiscal years. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period in which the effect of the change in the new corporate tax rate is recognized.

As the FASB continues interpreting the impact of tax reform on financial reporting, Doeren Mayhew’s accounting and assurance advisors stand ready to guide organizations in navigating this new territory. To obtain assistance, contact us today.

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