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Tax Reform Is Now Reality – Are you prepared today for 2017 Annual Financial Reporting Purposes?

By: James T. Hedderman Michael L. Dembek |

With the strike of a pen on December 22, 2017, President Trump officially enacted  sweeping Tax Reform legislation into law. Have you considered the implications on your income tax provision for calendar year-end 2017? Have you discussed the impact to your financial statements with your C-Suite and external auditors? Has your company given consideration to company plans and partners impacted by your financial results? Our True Alert is intended to bring to light some of the calculations, considerations, and analysis that your organization should be thinking about today. If your company would like to discuss the tax accounting changes driven by tax reform, your True Partners team is here to help.

Our True Alert is intended to bring to light some of the calculations, considerations, and analysis that your organization should be thinking about now.

Tax Reform – Tax Accounting Considerations

With Tax Reform officially becoming law on December 22, 2017, all taxpayers should be analyzing today the accounting for income taxes (ASC 740) impact to their upcoming 2017 annual financial statements.  The listing below provides the key highlights regarding the potential ASC 740 impact.

  • The tax effects of changes in tax law or rates should be recognized in the period in which the legislation is enacted. Therefore, the implications of changes in tax law or rates should be accounted for within the 2017 annual financial statements if a calendar year taxpayer.
  • With the new tax law enacted and a corporate tax rate of 21% for taxable years beginning after 12/31/2017, taxpayers should be prepared to revalue their applicable deferred tax assets (“DTA”) and deferred tax liabilities (“DTL”) to account currently for the future benefit/obligation.
    • Don’t forget the federal benefit of state deferred items should be adjusted from a 35% tax rate to the new tax rate of 21%.
    • If in a DTA position, the revaluation will reduce the future benefit and give rise to a deferred tax expense when recorded.
    • If in a DTL position, the revaluation will reduce the future obligation and give rise to a deferred tax benefit when recorded.
    • DTAs / DTLs associated with other comprehensive income will record a rate change through continuing operations
  • Companies will need to think carefully about the likelihood of utilization of deferred tax assets such as tax credits and net operating losses.
    • Will your valuation allowance position need to be modified?
    • With the repeal of corporate Alternative Minimum Tax Rate, can your AMT credit carryforward be utilized?
  • If you have uncertain tax positions, be sure to modify the federal benefit of state to the new federal rate of 21%.
  • The 100% bonus depreciation may have a significant impact if taxpayers apply the immediate deduction to fixed assets acquired after September 27, 2017 and before January 1, 2023.
  • For taxpayers with significant interest expense, will the interest deduction limitation create year-over-year deferred tax assets?  If so, valuation allowance considerations may need to be discussed with your audit firm. Does this create a “naked credit?”
  • With the utilization of net operating losses (“NOLs”) being limited to 80% for net operating losses generated after 2017 and not having an expiration, valuation allowance discussions will need to consider both the historical risk of NOLs expiring unutilized as well as the carryforward benefits of future NOLs.
  • The adjustments to I.R.C. Section 162(m) will likely disallow additional compensation expense.  Be sure to include this impact in your effective tax rate analysis as well as a source of additional taxable income prospectively for your scheduling of deferreds and valuation allowances.
  • For interim reporting purposes,
    • the forecasted annual effective tax rate shall include the impact of the updated tax rate beginning in the first period that includes the enactment date. If not a calendar year taxpayer then the quarter in which December 22, 2017 applies.
    • the impact of revaluing deferred tax assets / (liabilities) and associated valuation allowances shall be recorded as a discrete item from continuing operations as of the enactment date.
    • Are you an organization that historically calculated temporary differences in great detail due to the permanent impact from the IRC Section 199 deduction?   If so, with the repeal of IRC Section 199, can you streamline your forecasting process?
  • International Impacts to consider:
    • Repatriation
      • Have you calculated your net accumulated earnings from controlled foreign corporations?
      • With the charge for profits not historically repatriated back to the United States, if the election is made to pay the tax over an eight year period, be sure to document the current vs. non-current liabilities.
      • If funds are to be distributed, have you considered withholding taxes due as funds make their way to the United States?
    • If the foreign tax credit carryover utilization is limited by the dividend exemption, consider the need for additional valuation allowances.
    • Have you identified the amount of previously untaxed foreign earnings subject to tax based upon 15.5% for cash & cash-equivalents and 8% for non-cash assets?
  • What will states do in response to tax reform?
    • Will states decouple from the immediate 100% deduction on fixed assets?
    • Has your organization modeled out the impact state taxes will have on your provision?
      • The lower federal tax rate will leave state provisions having a more material impact on your effective tax rate (“ETR”).
      • Reduced federal benefit of state deduction.
      • The repeal of the I.R.C. Section 199 deduction in states that conformed to the federal code will increase the ETR impact
      • How will the limitation on interest deductions impact your state provision?

If your company would like to discuss the tax accounting changes driven by tax reform, please reach out to one of our team members.

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