Reporting the effects of tax reform
Published January 8, 2019
The Financial Accounting Standards Board (FASB) continues to monitor how companies and their auditors are tackling the financial reporting ramifications of the major new provisions of the Tax Cuts and Jobs Act (TCJA). For now, no new guidance is in the works, though some uncertainty remains regarding the global intangible low-taxed income (GILTI) regime, the base erosion and antiabuse tax (BEAT) and realization of deferred tax assets.
New tax rules
Signed into law on December 22, 2017, the TCJA ushered in some of the biggest changes to federal tax law in decades. Provisions that are expected to have major effects on businesses include:
- Replacement of graduated corporate income tax rates ranging from 15% to 35% with a flat 21% rate,
- Repeal of the corporate alternative minimum tax (AMT),
- A new 20% deduction for qualified business income for so-called “pass-through” entities,
- Expansion of bonus depreciation and the first-year Section 179 expense deduction,
- Increased annual gross-receipts thresholds for eligibility to use certain simplified tax accounting methods,
- Elimination of the Section 199 deduction,
- Repeal of the earnings stripping rules,
- New limits on interest expense deductions, with several exceptions, and
- New limits on net operating loss (NOL) deductions.
The TCJA also introduced the GILTI regime, which imposes a tax on foreign income in excess of the deemed returns on the tangible assets of foreign corporations. In addition, it created the BEAT, which companies must pay if it is greater than their expected tax liability.
In January 2018, the FASB scrambled to address some of the most pressing questions about the new tax law. The FASB’s website featured a Q&A document that covered queries about the BEAT and GILTI. The document clarified that companies shouldn’t discount the liability on the deemed repatriation of earnings or AMT credits that become refundable.
For the most part, FASB research staff have found that companies and accountants have figured out the financial reporting implications of the tax law change. But many are awaiting guidance or updates from the IRS. In addition, questions about accounting for GILTI persist.
For GILTI, the FASB received inquiries on whether deferred tax assets and liabilities should be recognized for basis differences expected to reverse as GILTI in future years, or if the tax on GILTI should be included in tax expense in the period in which it’s incurred. The FASB’s Q&A document indicates that FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes, could allow either interpretation, depending on the facts and circumstances.
Many businesses are also unsure when to realize deferred tax assets from NOLs. Under one view, a business would follow the tax law ordering rules to determine whether existing deferred tax assets are expected to be realized.
Under a second interpretation, a business would apply what the FASB calls a “with-and-without approach” to determine whether the deferred tax asset would be realized. This means the business would compare what it expects its tax expense to be after using the NOL with what it expects its tax expense to be without using the NOL.