Editors: Mark Heroux, J.D.
In 2017, one of the most comprehensive tax laws of all time, the Tax Reduction and Employment Act (TCJA), P.L. 115– –97was issued. In addition to companies and practitioners who had to reassess important aspects of tax law, there was a great focus on the effects of these legislative changes on the annual financial statements according to FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes. The COVID– –19th The pandemic began on March 27, 2020, the entry into force of the Coronavirus Law on Aid, Aid and Economic Security (CARES), P.L. 116– –136.
In an attempt to provide economic stimulus through the income tax system, the CARES Act temporarily suspended or amended several elements of the TCJA (e.g. rules for net operating losses (NOL) and interest capping) and provided an important technical correction related to qualified improvement traits (QIP). This discussion highlights some of the major issues with Issue 740 that can arise in both interim and annual finance Statement.
Revaluation of deferred tax accounts
Pursuant to Topic 740, the impact of changes in income tax laws (or rates) on Deferred Tax Assets (DTAs) and Deferred Tax Liabilities (DTLs) in continuing operations must be recognized in the period that includes the effective date (i.e., March 27) . 2020 in the case of the CARES Act). The effects on the income tax receivables or liabilities are also recognized in the period in which they come into effect, even if the deferred tax balance sheets refer to an earlier period. When reassessing DBAs or DTLs, companies must consider future cancellations and taxable temporary differences as of the effective date to determine the applicable law that applies to each item. For example, due to the CARES Act, companies may have a different interest expense limit (Section 163 (j)) than they originally recorded, or due to the new ability to write off QIP over 15 years, they may reassess the tax base in fixed assets (or take 100% bonus write-off). These possible changes necessarily affect the DTAs or DTLs recorded.
Effects on redemption claims
The CARES act temporarily restored the ability to carry back NOLs from 2018, 2019 and 2020 to offset taxable income over the previous five years. This creates the opportunity to capture a current benefit for losses that would otherwise have been carried forward. If a company intends to choose from carryback, or if there is no historical taxable income to offset, companies should continue to record all NOLs generated as DBA. In accordance with the TCJA, losses will continue to be carried forward unlimited.
calendar– –year Taxpayers with NOL from 2018 and 2019, originally measured at the current corporate tax rate of 21%, can now be repatriated to offset taxable income In front– –TCJA Tax rates of up to 35%. However, the exact value of these NOL transfers may be affected by applied for credits, conducted elections, or other restrictions that may exist in previous years. Therefore, care must be taken when calculating the potential benefits of these NOLs. Taxpayers who expect to carry these NOLs back should recognize the expected benefit as an increase in income tax receivable (or a reduction in income tax payable). Any benefit obtained at a rate other than 21% will affect the company's effective tax Rating.
The TCJA eliminated the AMT (Corporate Alternative Minimum Tax) regime. As of 2018, any NOL generated will only affect regular federal tax and will not generate any NOL for AMT purposes. If a NOL is rolled back to a year prior to 2018, companies may be subject to AMT, which can result in AMT loan carryforwards. AMT credits generated are refundable and should be taken into account when calculating the expected tax benefit by the company. In addition, companies that benefit from certain loans that AMT can offset should consider the resulting impact on their loans Lecture.
In addition, the CARES Act enables full repayment of AMT loan carryforwards from 2019 instead of a period in future years. The TCJA previously did not allow the credits to be fully refunded until 2021. The remaining credits should be included in the list current– –year Income tax receivables and reclassification from long-term balance sheet accounts. Taxpayers can choose to have the credits refunded in full for tax years beginning in 2018.
For the purposes of interim reporting, the tax effects would be recorded during the effective period (e.g. the first quarter of 2020 for the calendar) year– –The End Companies) and not allocated to subsequent interim periods through adjustments to the estimated annual effective tax Rating.
Temporary differences at the beginning of the final year in which the CARES Act was enacted, which will be reversed in whole or in part in the current year, should be revalued at the tax rate in the repatriation period if these differences are likely to arise or increase a current– –year NOL that is carried back. This revaluation should be recorded as a discreet item. Temporary differences that are from the year and likely to contribute to a carried– –back NOL affects the estimated annual effective tax rate used in interim periods. Temporary differences, which are expected to reverse in later years, would generally not change the annual effective tax calculation Rating.
The entity should take into account changes to its forecast effective tax rate for the current year that will be used to calculate the provisional tax provision, including the impact of changes in forecast earnings / loss and the entity's ability to reap the benefits of any forecast losses for the current year to capture Year.
If a company complies with the simplification provisions of Accounting Standard Update No. 2019– –12, Income Taxes (Issue 740): In simplifying the accounting for income taxes, particular care should be taken in determining the provisional tax benefit year– –to– –Date losses.
Permission to submit reviews
According to Theme 740, when assessing the feasibility of DBAs, organizations must evaluate all positive and negative evidence. An allowance must be made for DBAs if it is likely that all or some of the DBAs will not be realized. Theme 740 provides four sources of taxable income to consider when deciding whether to realize the benefit DBAs:
- Taxable income in previous years of repatriation if the repatriation is permitted under the tax law;
- Future reversal of existing taxable temporary differences;
- Future taxable income without reversing temporary differences and lectures; and
- Tax planning strategies.
In the event of changes to the CARES Act for the use of NOLs, increased limits on interest expenses, etc., companies should review the tax changes and the ability to implement double taxation agreements that ultimately lead to the recording or approval of a value adjustment. Organizations should evaluate all available positive and negative evidence affecting each of the four sources of income, and be aware that in some cases, improved financial modeling may be required. (However, if there is sufficient positive evidence of income from one source, it may not be necessary to evaluate other sources.)
In addition to considering legislative changes (e.g. availability of NOL returns and changes in interest rate restrictions), companies should reassess future income projections, especially given current economic conditions. A change in the assessment of an allowance for future income is recorded in the interim quarter as a discrete item in earnings from continuing operations or Loss.
As with any tax position, when considering the impact of any aspect of the CARES Act, taxpayers must evaluate their tax positions under the "Recognition and Evaluation" framework of topic 740, where a tax benefit can only be captured if it is captured is more than It is likely that the position will be maintained due to its technical merits, and the benefit recorded is the greatest benefit for which there is a greater than 50% probability that it can be realized upon final settlement. To the extent that ambiguities or omissions in elements of the enacted legislation are perceived, companies should carefully consider and balance all available technical authorities in order to achieve their goals More– –probably– –when– –Not Conclusions. To the extent that companies have realized uncertain tax benefits due to the expiration of the law, they should consider the impact of NOL resignation on those years. In the event of a NOL withdrawal, those years will now be audited and these tax benefits may need to be reviewed reversed.
Mark Heroux, J.D., is a tax advisor and head of Tax Advocacy and Controversy Services at Baker Tilly US, LLP in Chicago.
For more information on these items, please contact Mr. Heroux at 312-729-8005 or [email protected].
Unless otherwise noted, contributors are members of or affiliated with Baker Tilly US, LLP.