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 is generally
required.
Legislative and Economic Setting
In 2022, two pieces of legislation with significant tax-related
provisions were enacted. The CHIPS Act of 2022 (H.R. 4346), signed into law on August 9,
2022, established an advanced manufacturing investment credit under new IRC
Section 48D. The Inflation Reduction Act of 2022 (H.R. 5376), signed into law on August 16,
2022, included (1) a 15 percent book minimum tax (corporate alternative minimum
tax [AMT]) on the adjusted financial statement income (AFSI) 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.
The provisions of the Inflation Reduction Act went into effect
for taxable years beginning after December 31, 2022. While the ASC 740
ramifications of the corporate AMT were relatively minor, the direct-pay and
transferability provisions of the new tax credits have presented (and continue
to present) a host of new challenges.
In addition, multinational entities have been navigating the
Organisation for Economic Co-operation and Development’s (OECD’s) Pillar Two tax
regime, which introduces a global minimum corporate tax rate of 15 percent. To
implement the global minimum tax, individual countries are responsible for
establishing laws and regulations in line with the framework provided by the
OECD. Many countries have enacted legislation that went into effect in 2024.
Generally, we expect these new taxes to be accounted for in a manner similar to
AMTs for consolidated financial statements, but the accounting impacts of each
new law will need to be separately evaluated in each jurisdiction.
Standard-Setting Activity
In December 2023, the FASB issued ASU 2023-09, which establishes new income
tax disclosure requirements within ASC 740 in addition to modifying and
eliminating certain existing requirements. The ASU’s amendments are intended to
enhance the transparency and decision-usefulness of such disclosures. Under the
new guidance, public business entities (PBEs) must consistently categorize and
provide greater disaggregation of information in the rate reconciliation. The
ASU also includes additional disaggregation requirements related to income taxes
paid. The ASU’s disclosure requirements apply to all entities subject to ASC
740. PBEs must apply the amendments to annual periods beginning after December
15, 2024 (2025 for calendar-year-end PBEs). Entities other than PBEs have an
additional year to adopt the guidance.
Accounting for Investments in Tax Credit Structures
In March 2023, the FASB issued ASU 2023-02,
which expands the use of the proportional amortization method — which
previously applied only to low-income housing tax credit investments — to
other tax equity investments that meet certain revised criteria in ASC
323-740-25-1. The ASU is intended to improve the accounting and disclosures
for investments in tax credit structures.
For additional information about tax credit structures, see
Appendixes
C and D of Deloitte’s Roadmap Equity Method Investments and Joint
Ventures.
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
Audit &
Assurance
Partner
Deloitte &
Touche LLP
+1 714 436
7277
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Mark Crowley
Audit & Assurance
Managing Director
Deloitte & Touche LLP
+1 203 563 2518
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For information about Deloitte’s service offerings related to
the accounting for income taxes, please contact:
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Lisa
Paradowski
Audit &
Assurance
Managing
Director
Deloitte &
Touche LLP
+1 312 486
2948
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