Alert

How Tax Reform Affects Accounting for Income Taxes (ASC 740)

On December 20, 2017, the US Senate and House of Representatives approved the reconciled, final version of the Tax Cuts and Jobs Act. President Trump is expected to sign the bill into law.

The legislation will significantly alter the tax landscape, including accounting for income taxes, known as ASC 740. Other expected changes include a significant reduction in the corporate tax rate, expansion or disallowance of various business deductions, and comprehensive changes to international tax provisions.

Timing

If enacted after December 31, 2017, the new law won’t need to be reflected in calendar year companies’ 2017 year-end tax provisions. However, companies will need to assess the impact on their financial statement disclosures.

If the new law is enacted by December 31, 2017, calendar-year companies will be required to include the effects of it in their 2017 year-end tax provisions, creating a significant burden on companies to determine how they’re impacted. Fiscal year-end companies with quarterly reporting will also be required to reflect the effect of the new law in the reporting period that the enactment date falls within.

Tax Law Changes

At a high-level, the major changes that could impact the tax provision and financial statements under ASC 740 are as follows:

  • Corporate tax rate would be reduced to 21% and made permanent
  • Corporate AMT would be repealed
  • Full expensing of certain tangible property placed in service after September 27, 2017
  • Interest deduction is limited to 30% of adjusted taxable income
  • Net operating loss deduction is limited to 80% of taxable income, and unused amount wouldn’t expire
  • R&D expenditures would be capitalized and amortized over a 5-year period
  • Numerous business expenses would be nondeductible and some credits modified or repealed
  • Comprehensive and significant changes to the international tax regime
  • Deemed repatriation of undistributed foreign earnings subject to what’s known as a toll-charge—tax rate varies and may be paid over an eight-year period

Affected companies will be required to:

  • Re-measure deferred tax assets and liabilities for the changes, including any change in the need for a valuation allowance
  • Assess the impact of any disallowed deductions or credits on the company’s effective tax rate
  • For companies with international operations, assess the impact of the comprehensive changes on their financial statement positions and disclosures
  • For companies with undistributed foreign earnings, assess the need for current and noncurrent liabilities (if payment is spread) for the toll-charge
  • Assess the state tax implications of the federal changes, which will depend on the degree of conformity the state has with the Internal Revenue Code
  • Assess the impact on their disclosures, including the need to potentially include additional items in their effective rate reconciliation due to the lowered corporate rate
  • Consider the impact on tax internal controls and make appropriate modifications to address the need for different information and/or processes

We’re Here to Help

This legislation, when enacted, will be the largest and most significant change to the tax law in three decades. The challenge will be to have sufficient time and the appropriate involvement of tax specialists, particularly in the international area, to incorporate these changes into the 2017 financial statements and/or disclosures.

If you’d like to better understand how this potential change affects your business, contact your Moss Adams professional or email nationaltaxservices@mossadams.com.