2.3 Taxes Assessed in Lieu of Income Tax

In certain jurisdictions, some entities may be subject to certain taxes in lieu of an income tax, such as an excise or other type of tax that is based on a measure of income. For example, not-for-profit foundations that make certain minimum distributions are generally exempt from U.S. federal income taxes but may be subject to an excise tax on their net investment income.1 Such an excise tax meets the definition of a “tax based on income” and therefore is within the scope of ASC 740. Alternatively, in some jurisdictions, qualifying entities may, in lieu of an income tax, be subject to an excise tax that is based on a measure other than income (e.g., it is based on a percentage of assets or sales). Although this tax is levied in lieu of an income tax, it is not within the scope of ASC 740 because it is not based on a measure of income. Entities should carefully consider how each type of tax is assessed to determine whether the tax should be included within the scope of ASC 740.