So the Tax Cuts and Jobs Act (the “Act”) is here. While many are focusing on the impact of individual rate reduction and the impact on their itemized deductions, corporations need to assess the impact of the Tax Cuts and Jobs Act on financial statements–specifically on their deferred tax balances as part of the 2017 financial reporting.
Under ASC 740, Income Taxes, the financial statement impact of changes in tax laws and rates is recorded in an entity’s financial statements in the period in which the changes were enacted. As the Act was signed by President Trump on December 22, 2017, this means that this impact should be assessed as of that date, with the impact included in the financial statements for the fiscal period which contains that date. For calendar year-end reporting entities, this means their December 31, 2017 financial statements.
While the major impact of the Act on corporations is the reduction of the statutory tax rate to 21%, there are many other provisions in the Act which may have a significant impact on corporation’s deferred tax balances as well as their accounting for income taxes on a prospective basis. For instance, changes in the NOL carryforward rules, elimination of the AMT and limitations on the deductibility of interest expense will impact entities’ income tax calculations both in the year of enactment and beyond, as well as impact their need for valuation allowances related to deferred tax assets. Also, the change to a territorial tax system through a 100% dividends received deduction on payments from foreign subsidiaries, as well as the the deemed repatriation “toll tax” on post 1986 earnings and profits from such subsidiaries, will have a significant impact on the income tax expense and cash flows of entities with significant overseas operations both this year and in the future. As we have already seen, this impact is in the billions of dollars for certain entities.
Additionally, the new GILTI and BEAT taxes, both aimed at taxing profits earned in low-tax jurisdictions, are both new taxes and may be difficult to calculate for many entities.
In recognizing the challenges of recording the impact of the changes in the U.S. tax code from the Act in entities’ 2017 financial statements, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118) on December 22, 2017, which provided guidance on how to account for the impact of the Act. If registrants can’t complete their accounting by the filing of their 2017 financial statements, they can record provisional reasonable estimates of the impact. These provisional amounts would be adjusted, as necessary, when the entity’s accounting is complete. If an entity can’t reasonably estimate the impact of the changes in the rates and law due to the Act, they are to follow the old tax laws until that can compute this impact. While providing relief from the short-term crunch of accounting for the Act, SAB 118 assures that the accounting for the impact of the Act will extend into 2018.
The FASB has also gotten into the act of providing guidance on how to apply ASC 740. First, it has given non-public entities the option of following SAB 118, which many will undoubtedly do. Plus, it has issued proposed guidance on such topics as how to account for the elimination of the Alternative Minimum Tax, and whether liabilities such as the toll tax should be discounted.
So there is much going on in this area and accountants will continue to struggle with dealing with the impact of the Act on financial statements well into 2018. Now is the time to get a strong understanding of the major provisions of the Act that impact corporations so you can prepare for the changes and remain ahead of the curve when it comes to accounting for them.
To learn more about the Tax Cuts and Jobs Act, register for one of our upcoming live tax reform webinars or self-study courses.
Rich Daisley, CPA, is Senior Director, Accounting and Financial Reporting Content for Surgent CPE. With over 26 years of experience in the accounting and auditing field, Mr. Daisley has worked in both the client service setting, mainly for PwC’s Capital Markets and Accounting Advisory Services Group and for PECO Energy’s Merger and Acquisition Group, and in the internal capacity setting as a course developer and facilitator creating leading training courses for PwC and Surgent. Rich lives in suburban Philadelphia.