3.5 Income Taxes

ASC 740-10-30-27 requires a group of entities that files a consolidated tax return to allocate the “consolidated amount of current and deferred tax expense . . . among the members of the group when those members issue separate financial statements.” For income tax accounting purposes, a “member” is generally a taxable legal entity (i.e., a corporation or an LLC that has elected to be taxed as a corporation) that is included in the parent’s consolidated tax return. Thus, if the carve-out entity comprises one or more taxable legal entities that are included in the parent’s consolidated tax return (as might be the case if the carve-out financial statements are being prepared in connection with a spin-off of a subsidiary), an allocation of current and deferred income tax expense is explicitly required under ASC 740-10-30-27.1

ASC 740-10-30-27 does not prescribe a particular method for allocating current and deferred income taxes in the income statement of separate financial statements of a member; rather, it requires only the use of a systematic and rational method that is consistent with the broad principles established by ASC 740. Several income tax allocation methods may meet the requirements of ASC 740-10-30-27, including the commonly applied separate-return and parent-entity-down methods. Question 3 of SAB Topic 1.B.1 states that for public entities, the separate-return approach is preferable to other approaches and that, if an approach other than the separate-return approach is used, a pro forma income statement that reflects a tax provision prepared under the separate-return method must be provided. For this reason, entities often use the separate-return method to allocate income taxes in carve-out financial statements that will be included in an SEC filing.

See Section 8.2 of Deloitte’s Roadmap Income Taxes for additional guidance on the allocation of income taxes in carve-out financial statements.