On the Radar
Income Taxes
The accounting for income taxes under ASC 740 can be extremely complex. The amount of
income tax expense an entity must record in each period does not simply equal the amount
of income tax payable in each period. Rather, ASC 740 requires an entity to record
income tax expense in each period as if there were no differences between (1) the timing
of the recognition of events in income before tax for U.S. GAAP purposes and (2) the
timing of the recognition of those events in taxable income.
In accordance with ASC 740-10-10-1, an entity’s overall objectives in
accounting for income taxes are to (1) “recognize the amount of taxes payable or
refundable for the current year” (i.e., current tax expense or benefit) and (2)
“recognize deferred tax liabilities [DTLs] and assets [DTAs] for the future tax
consequences of events that have been recognized in an entity’s financial statements or
tax returns” (resulting in deferred tax expense or benefit). An entity’s total
tax expense is generally the sum of these two components and can be expressed as the
following formula:
To apply the guidance in ASC 740, entities must understand not
only the standard’s accounting requirements but also the tax
codes under various jurisdictions. Accordingly, coordination
between the accounting and tax departments may be
required.
Legislative and Economic Setting
In 2017, we saw sweeping tax reform unfold in the United States.
The Tax Cuts and Jobs Act (the “2017 Act”) introduced a host of new concepts,
including a one-time transition tax on unrepatriated foreign earnings, along
with a new tax on global intangible low-tax income (GILTI) inclusions, the base
erosion anti-abuse tax (BEAT), and more restrictive interest limitations under
IRC Section 163(j). In some respects, however, the 2017 Act simplified the
accounting under ASC 740 because assertions entities needed to make to avoid
recording DTLs for unremitted foreign earnings now primarily apply only to
ancillary taxes (i.e., withholding and state).
In 2020, the unstable economic environment brought its own set
of challenges related to the ability to successfully forecast taxable income,
both for establishing an entity’s annual effective tax rate used for calculating
interim tax provisions and for assessing the realizability of net operating loss
carryforwards and other attributes.
Now, in late 2022, two pieces of legislation with significant
tax-related provisions have been enacted. The CHIPS Act of 2022 (HR 4346), signed into law on August 9,
2022, establishes an advanced manufacturing investment credit under new IRC
Section 48D. The Inflation Reduction Act (HR 5376), signed into law on August 16,
2022, includes (1) a 15 percent book minimum tax (corporate alternative minimum
tax) on the adjusted financial statement income of applicable corporations; (2)
a plethora of clean-energy tax incentives in the form of tax credits, some of
which have a direct-pay option or transferability provision; and (3) a 1 percent
excise tax on certain corporate stock buybacks.
For additional details and ASC 740 considerations related to the
tax-related provisions of these new pieces of legislation, see Deloitte’s Tax
Alert Emerging ASC 740 Issues: Recent Tax
Legislation.
Standard-Setting Activity
The FASB has undertaken several projects related to reducing
some of the complexity associated with the accounting for income taxes under ASC
740. The status of three such projects is discussed below.
ASU 2019-12: Simplifying the Accounting for Income Taxes
The amendments under ASU 2019-12 are effective for public
business entities (PBEs) and non-PBEs with fiscal years beginning after December
15, 2021. For non-PBEs, the ASU is effective for interim periods within fiscal
years beginning after December 15, 2022. Early adoption is permitted.
ASU 2019-12 addresses topics such as the accounting
for taxes under hybrid tax regimes, the accounting
for increases in tax deductible goodwill, the
allocation of tax amounts to separate company
financial statements within a group that files a
consolidated tax return, intraperiod tax allocation,
interim-period accounting, and the accounting for
the tax effects of ownership changes in investments.
For additional details, see Deloitte’s December 19, 2019,
Heads Up.
Disclosure Requirements
In March 2019, the FASB issued a proposed ASU as part of its
disclosure framework project to improve the effectiveness of disclosures in the
notes to financial statements. The proposed ASU was intended to modify or
eliminate certain requirements related to income tax disclosures as well as
establish new disclosure requirements. According to feedback received on the
proposed ASU, financial statement users wanted more information about an
entity’s tax footprint so they could make capital allocation decisions.
Respondents also believed that an entity could provide such information by
making incremental improvements to its income tax disclosures. Therefore, at its
March 23, 2022, meeting, the FASB updated the project’s objective to focus on
improving the transparency and decision-usefulness of income tax disclosures.
The Board also realigned the project’s scope to concentrate on disclosures
related to income taxes paid and the rate reconciliation table, while retaining
within the scope of the project certain of the proposed ASU’s generally
supported amendments (e.g., removing the existing requirement in ASC
740-30-50-2(b) to disclose the cumulative amount of each type of temporary
difference when a deferred tax liability is not recognized because of the
exceptions to comprehensive recognition of deferred taxes related to
subsidiaries and corporate joint ventures). At its November 30, 2022, meeting,
the FASB reached a number of tentative decisions about the project and indicated that it
expects to issue a proposed ASU for comment in the first quarter of 2023. See
Appendix C of Deloitte's Roadmap
Income Taxes for more
information about the status of the project.
Accounting for Investments in Tax Credit Structures
In August 2022, the FASB issued a proposed ASU
that would expand the use of the proportional amortization method to other
investment tax credits besides low-income housing tax credit investments
provided that the other investments meet certain revised criteria in ASC
323-740-25-1. The proposed ASU is intended to improve the accounting and
disclosures for investments in tax credit structures.
At its December 1, 2022, meeting, the Emerging Issues Task Force reached a
final consensus that would require public business entities to adopt the
proposed ASU's guidance for fiscal years beginning after December 15, 2023,
and other-than-public entities to adopt the guidance for fiscal years
beginning after December 15, 2024. The FASB staff will draft an ASU for
ratification by the Board at a future meeting.
For additional details about tax credit structures, see
Deloitte’s December 2022 EITF Snapshot.
For a comprehensive discussion of
the income tax accounting guidance in ASC 740, see
Deloitte’s Roadmap Income
Taxes.
Contacts
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Matt Himmelman
Partner
Deloitte & Touche
LLP
+1 714 436 7277
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Steve Barta
Partner
Deloitte & Touche
LLP
+1 415 783 6392
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