2.1 Introduction

ASC 740 applies to the accounting for all taxes imposed on an entity by a taxing authority that are based on the entity’s income. This may include taxes imposed by U.S. and foreign federal, state, and local jurisdictions and is true regardless of how a tax is labeled by a particular jurisdiction. Although this principle may appear simple, entities must often use significant judgment in determining whether a tax is an income tax within the scope of ASC 740. Taxes that are not income taxes within the scope of ASC 740 are accounted for in accordance with other U.S. GAAP generally applicable to the recognition, measurement, and disclosure of assets and liabilities, income, and expenses throughout the Codification. This can result in significant differences between the accounting for taxes under ASC 740 and the accounting for taxes under other Codification guidance. For example, deferred taxes are not recognized for non-income-based taxes, and neither expense nor income associated with non-income-based taxes is recorded in the income tax expense line in the statement of operations. In addition, uncertainties about the recognition and measurement of a non-income-based tax in a particular jurisdiction would not be accounted for in accordance with the guidance applicable to uncertain tax positions in ASC 740-10.

ASC 740-10

15-1 The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Income Taxes Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Income Taxes Topic.

Entities

15-2 The principles and requirements of the Income Taxes Topic are applicable to domestic and foreign entities in preparing financial statements in accordance with U.S. generally accepted accounting principles (GAAP), including not-for-profit entities (NFP) with activities that are subject to income taxes.

15-2AA The guidance in this Subtopic relating to accounting for uncertainty in income taxes applies to all entities, including tax-exempt not-for-profit entities, pass-through entities, and entities that are taxed in a manner similar to pass-through entities such as real estate investment trusts and registered investment companies.

Transactions

15-3 The guidance in the Income Taxes Topic applies to:

Domestic federal (national) income taxes (U.S. federal income taxes for U.S. entities) and foreign, state, and local (including franchise) taxes based on income
An entity’s domestic and foreign operations that are consolidated, combined, or accounted for by the equity method.

15-4 The guidance in this Topic does not apply to the following transactions and activities:

A franchise tax (or similar tax) to the extent it is based on capital or a non-income-based amount and there is no portion of the tax based on income. If a franchise tax (or similar tax) is partially based on income (for example, an entity pays the greater of an income-based tax and a non-income-based tax), deferred tax assets and liabilities shall be recognized and accounted for in accordance with this Topic. Deferred tax assets and liabilities shall be measured using the applicable statutory income tax rate. An entity shall not consider the effect of potentially paying a non-income-based tax in future years when evaluating the realizability of its deferred tax assets. The amount of current tax expense equal to the amount that is based on income shall be accounted for in accordance with this Topic, with any incremental amount incurred accounted for as a non-income-based tax. See Example 17 (paragraph 740-10-55-139) for an example of how to apply this guidance.
A withholding tax for the benefit of the recipients of a dividend. A tax that is assessed on an entity based on dividends distributed is, in effect, a withholding tax for the benefit of recipients of the dividend and is not an income tax if both of the following conditions are met:
1. The tax is payable by the entity if and only if a dividend is distributed to shareholders. The tax does not reduce future income taxes the entity would otherwise pay.
2. Shareholders receiving the dividend are entitled to a tax credit at least equal to the tax paid by the entity and that credit is realizable either as a refund or as a reduction of taxes otherwise due, regardless of the tax status of the shareholders.
See the guidance in paragraphs 740-10-55-72 through 55-74 dealing with determining whether a payment made to a taxing authority based on dividends distributed is an income tax.

Related Implementation Guidance and Illustrations

Treatment of Certain Payments to Taxing Authorities [ASC 740-10-55-67].
Example 17: Determining Whether a Tax Is an Income Tax [ASC 740-10-55-139].

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.