E.8 Special Deductions
Under U.S. GAAP, tax benefits of special deductions for financial reporting purposes
are recognized no earlier than the year in which they are available to reduce
taxable income on the tax return.
ASC 740-10-25-37 includes guidance on the recognition of tax benefits from
transactions that result in special tax deductions. The term “special deduction” is
not defined, but ASC 740-10-25-37 and ASC 740-10-55-27 through 55-30 offer four
examples: (1) tax benefits for statutory depletion, (2) special deductions for
certain health benefit entities (e.g., Blue Cross/Blue Shield providers), (3)
special deductions for small life insurance companies, and (4) a deduction for
domestic production activities. In addition, the deduction for FDII qualifies as a
special deduction. See Section 3.2.1 for
additional guidance.
Although entities are not permitted to anticipate future special deductions when they
measure deferred liabilities, the future tax effects of special deductions may
nevertheless affect (1) the average graduated tax rate used for measuring DTAs and
DTLs when graduated tax rates are a significant factor and (2) the need for a
valuation allowance for DTAs. In those circumstances, implicit recognition is
unavoidable because those special deductions are one of the determinants of future
taxable income, and future taxable income is used to determine the average graduated
tax rate and may affect the need for a valuation allowance.
There is no guidance on special deductions under IFRS Accounting
Standards.