Accounting Implications for Tax Reform

The enacting of the Tax Cuts and Jobs Act (TJCA) on December 22, 2017 has had an immediate effect on companies’ accounting practices. For an overview of changes, further guidance, and considerations you should keep in mind as the tax deadline approaches, please see below.

Changes and Implications at a Glance

New Corporate Tax Rate. The Alternative Minimum Tax (AMT) has been replaced by a flat corporate income tax rate of 21%. AMT credit carryovers can be used to offset regular tax liability. Unused credits can become refundable.

Timing Challenges. The TCJA was enacted on December 22, 2017. The new corporate tax rate will need to be applied to deferred balances as of this date, as ASC 740 requires the effects of changes in tax laws on deferred balances to be recognized in the period in which the legislation was enacted. Companies with a fiscal year end that isn’t December 31 face particular issues, including determining the correct blended tax rate to apply.

Foreign Source Earnings. Future foreign source earnings can now be repatriated under a under a territorial tax system and avoid incurring further U.S. taxes. Additionally, previously deferred foreign source earnings are now subject to a one-time transition tax. Cash and other specified assets are taxed at 15.5%, while any remaining amount is taxed at 8%.

Carryforwards/Carrybacks. The maximum deduction for net operation loss carryforwards is now limited to a percentage of taxable income for NOLs arising after 2017. All carrybacks are repealed.

Section 199. Section 199 domestic production deduction is now repealed.

Changes to Certain Deductions, Exclusions, and Credits. Deduction is limited for net interest expense incurred by US companies. New investments in certain qualified depreciable assets made after September 27, 2017 are now able to be immediately expensed.

Revenue Recognition. Tax accounting methods for revenue recognition may need to be changed.

Guidance

SEC Guidance. The Securities and Exchange Commision (SEC) released SAB 118 in response to the passage of the TCJA, which states that states that a company may report provisional amounts based on reasonable estimates for items for which the accounting is incomplete.

FASB Guidance. The Financial Accounting Standards Board (FASB) has proposed an accounting standards update to address the challenges associated with moving to the comprehensive flat 21% corporate income tax rate.

Considerations
  • SEC reporting considerations, including the following:
    • Preparation of management’s discussion and analysis under Item 303 of Regulation S-K may have changed when the effects of the tax law changes are material.
    • Material liquidity implications of paying the one-time transition tax.
    • Remeasurement of deferred tax assets and liabilities.
    • Disclosure of the effect of the change to the tax rate on the company in the provision.
  • Determining whether internal controls are effective to address financial reporting effects of implementing the TCJA and SAB 118.
  • Calculating changes to federal deferred tax balances.
  • Calculating the one-time transition tax on previously deferred foreign earnings.
  • Evaluating whether NOL and foreign tax credits are available to offset the transition tax, and whether any remaining carryforwards are realizable.
  • Estimating which outside basis differences related to foreign subsidiaries exist after considering any one-time transition tax.
  • Evaluating whether AMT credit carryforwards are realizable.
  • Evaluating which assets qualify for immediate expensing.
  • Evaluating compensation plans.
  • Evaluating the impact upon current and deferred states.