IPT 2016 Annual Conference Current Environment … · 2016 IPT Annual Conference Current Environment . 3. ... Taxing authority has full knowledge of all relevant information ... No

2016 IPT Annual Conference

IPT 2016 Annual Conference

John Bennecke Managing Director

True Partners Consulting LLC Chicago, Illinois

[email protected]

Teri Hull Vice President - Tax

Dart Container Corporation Mason, Michigan

[email protected]

Current Environment Accounting for Income Taxes –

ASC740


Agenda

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Current Environment Income Tax Accounting - Overview Current Provision Deferred Provision Valuation Allowance Impact Uncertain Tax Positions

Incentive Considerations Disclosures Questions


Current Environment

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Accounting Standard Codification 740 Overview

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Addresses the financial accounting and reporting for the effects of income taxes that result from an enterprise’s activities during the current and preceding years.

Financial accounting and reporting = GAAP Income Taxes Applies to federal, state, and foreign jurisdictions What is an income tax?


Accounting for Income Taxes Overview ctd.

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Two Primary Objectives of ASC 740 Recognize the amount of taxes payable or

refundable for the current year Recognize deferred tax assets (“DTA’s”) and

deferred tax liabilities (“DTL’s”) DTA & DTL represent estimated future tax effects

attributable to temporary differences and carryforwards recognized in the financial statements or tax returns


Current Income Tax Provision

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Objective #1: Current Tax Provision Current Tax Expense or Benefit

“The amount of income taxes paid or payable (or

refundable) for a year as determined by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues for that year” (ASC 740-10-20).


Accounting for Income Taxes

Basic Formula #1 Basic Formula #2 Profit Before Tax (“PBT”) Net Income

+/- Total State Income Taxes

+/- Total Permanent Items +/- Total Permanent Items (including federal tax expense)

+/- Total Temporary Items +/- Total Temporary Items

Taxable Income Before NOL Taxable Income Before NOL

- NOL Utilized - NOL Utilized

Taxable Income Taxable Income

x Statutory Tax Rate x Statutory Tax Rate

Tax Before Credits Tax Before Credits

- Credits Utilized - Credits Utilized

Current Tax Provision Current Tax Provision


State Income Taxes ( Foreign Considerations ) State income taxes paid or accrued for the current year are

deductible for federal tax purposes Return to provision true-up impacts Federal return

Permanent Differences Differences between book and tax treatment of an item NOT

due to the timing Impacts effective tax rate

Temporary Differences Differences between book and tax treatment of an item due to

the timing of inclusion


Current Income Tax Provision


Objective #2: Deferred Tax Provision Deferred Tax Asset (Balance Sheet)

“The deferred tax consequences attributable to deductible temporary differences and carryforwards. A deferred tax asset is measured using the applicable enacted tax rate and provisions of the enacted tax law. A deferred tax asset is reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.”

Deferred Tax Liability (Balance Sheet)

“The deferred tax consequences attributable to taxable temporary differences. A deferred tax liability is measured using the applicable enacted tax rate and provisions of the enacted tax law.”


Deferred Income Tax Provision


Concept of Total Income Tax Provision Impact (Common Assumptions)


Total Income Tax Provision

Current Provision

Deferred Provision

Total Provision (Effective Tax Rate)

Perms Increase/Decrease No Impact Increase/decrease

Temps Increase/decrease Increase/decrease No Impact

Attributes Increase/decrease Increase/decrease Increase/decrease


ASC 740-10-30-5: “Reduce deferred tax assets by a valuation allowance if,

based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized.”

“The valuation allowance should be sufficient to reduce the

deferred tax asset to the amount that is more likely than not to be realized.”


Valuation Allowance


Need for Valuation Allowance Consider all positive and negative evidence and weight of

the evidence

Positive Evidence (ASC 740-10-30-22) Four sources of taxable income

Future reversals of existing temporary differences Future taxable income exclusive of temporary differences and

carryforwards Taxable income in prior carryback year(s) if permitted under tax

law Tax planning strategies

Evidence to support one source of taxable income may

be sufficient


Valuation Allowance


Negative Evidence (ASC 740-10-30-21) Examples

History of NOL’s Expiring tax credits Losses expected in early future years Unsettled circumstances that upon unfavorable resolution would

have an adverse effect on operations Brief carryforward/carryback periods

If negative evidence exists, it is difficult to conclude that no valuation allowance is needed


Valuation Allowance


Uncertain Tax Positions ( ASC740-10 )

Is intended to establish the threshold for recognizing benefits of tax return positions within the companies financial statements, the threshold is established based on a “More Likely than Not” standard ( MLTN ) to be sustained in it’s own merits by the applicable taxing authorities.


Uncertain Tax Positions – The 4 W’s

Who – Enterprises who account for income taxes in accordance with ASC 740(FKA FAS 109)

What – Accounting for uncertainty in income taxes When – Effective for fiscal years beginning after December

15, 2006 (All public companies), and fiscal years beginning after December 15, 2009 (Non-public companies), applies to annual financial statements.

Why – Address and minimize diversity in accounting for uncertainty in income taxes, and enhance transparency in financial reporting.


1st Year Five (Six)Step Process for ASC 740-10

Step One: Identification Step Two: Recognition Step Three: Measurement Step Four: Interest and Penalties Step Five: Disclosure Step Six : Tax Reporting


Step One: Identification

Technical Application: FIN 48 applies to all tax positions within the scope of FASB Statement No. 109

regardless of their level of uncertainty or the nature of the position “Accordingly, the Board decided that this Interpretation should broadly apply to all

tax positions.” (FIN 48 B12) Tax Position (very broadly defined) – can result in a permanent reduction of income

taxes payable, a deferral of income taxes, or a change in the realizability of DTAs. Decision not to file tax return An allocation or a shift in income between jurisdictions Characterization of income or a decision to exclude reportable taxable income in a

return Decision to classify a transaction, entity, or other position in a tax return as tax

exempt


Step Two: Recognition

Unit of Account Individual tax position Matter of judgment based on the facts and circumstances of that

position The manner in which the tax return is prepared and supported The expected approach the taxing authority would take during the

examination of the tax position if it had full knowledge of the facts Consistently applied from period to period unless change in facts &

circumstances


Step Two: Recognition (Cont’d.)

Tax position is recognized when it is “more-likely-than-not” that the position would be sustained as filed considering: Taxing authority has full knowledge of all relevant information

(without considering detection risk) Consider only technical merits of a tax position derived from

sources in the tax law (legislative intent, statute, regulations, case law, rulings, etc.)

Administrative practices and precedents that are widely understood can be considered

Tax position must be evaluated without considering the possibility of offset or aggregation

“More-likely-than-not” Positive assertion by management to entitlement of benefit Likelihood of more than 50%


Step Three: Measurement

Measurement of tax position Initial and subsequent measurement Largest amount of tax benefit greater than 50%

realized upon ultimate settlement with tax authority Having full knowledge of all facts

Consider amounts and probabilities of outcomes that could be realized upon ultimate settlement Based on facts, circumstances, and other information


Step Four: Interest and Penalties

Interest on the underpayment of taxes should be recognized in the first period the interest would begin accruing according to the provisions of the relevant tax law

Interest to be recognized: Statutory Rate of Interest X difference between the tax

position recognized in accordance with this Interpretation and the amount previously taken or expected to be taken in a tax return


Step Four: Interest and Penalties (Cont’d.)

If a tax position does not meet the minimum statutory threshold to avoid penalties, the penalty should be recognized in the period in which the enterprise claims or expects to claim the position in the tax return

Previously recognized interest and penalties associated with the position that subsequently meets the conditions to be recognized should be derecognized once the condition is met

Classifying interest and penalties on the income statement is an accounting policy decision and should be consistently applied to all financial information


Step Five: Disclosure

The Interpretation requires both qualitative and quantitative disclosures that should include: Tabular reconciliation of the total aggregate amount of

the unrecognized tax benefit at the beginning and end of the period including: The effects of the positions taken during the year Changes in assessments of prior-period positions The impact of settlements with taxing authorities

The total amount of unrecognized tax benefits that if recognized would affect the ETR


Step Five: Disclosure (Cont’d.)

The Interpretation requires both qualitative and quantitative disclosures that should include: Tabular reconciliation of the total aggregate amount of

the unrecognized tax benefit at the beginning and end of the period including: The effects of the positions taken during the year Changes in assessments of prior-period positions The impact of settlements with taxing authorities

The total amount of unrecognized tax benefits that if recognized would affect the ETR


Step Six: Tax Reporting

IRS Announcements

Announcements 2010-9 (1/26/2010) announced intention to require reporting of UTPs for certain taxpayers and invited public comment.

Announcement 2010-17 (3/5/2010) extended the comment period. Announcement 2010-30 (4/19/2010) unveiled draft Schedule UTP and instructions Treas. Reg. §1.6012-2(a)(4) and (a)(5) – Proposed “enabling” regulations issued on 9/7/2010.

Final regulations expected before year-end. Announcement 2010-75 (9/24/2010)

Final Schedule UPT & Instructions Addressed public comments:

5-year phase in based on asset size ($100M) No reporting of maximum tax adjustment No reporting of rationale and nature of position in description No reporting of administrative practice positions Clarified that Schedule UTP positions are consistent with reserve decisions made for audited

financial statements Clarified various other items

Issued to Directive to IRS agents and research personnel regarding the Service’s use of information obtained. M-3 working group to study duplicate reporting


Tax Holidays Tax Incremental Financing ( TIFS ) Reduced Tax Rates Income Tax Credits Refundable Credits Cash Grants

Common Domestic Incentives


Accounting for Income Taxes – Where do Credits and Incentives Go ???

Basic Formula #1 Basic Formula #2 Profit Before Tax (“PBT”) Net Income

+/- Total State Income Taxes

+/- Total Permanent Items +/- Total Permanent Items (including federal tax expense)

+/- Total Temporary Items +/- Total Temporary Items

Taxable Income Before NOL Taxable Income Before NOL

- NOL Utilized - NOL Utilized

Taxable Income Taxable Income

x Statutory Tax Rate x Statutory Tax Rate

Tax Before Credits Tax Before Credits

- Credits Utilized - Credits Utilized

Current Tax Provision Current Tax Provision

Everywhere


Incentive refundable? In absence of tax due? Can benefit reduce taxes not based upon income?

Against withholding tax? Is benefit fixed and certain? If fixed, anticipate full amount of benefit to be realized?

Performance based incentives? Sustainability of benefit contingent upon future

events? Benefit revocable by government authority? Clawbacks?

Questions to ask yourself


Utilization of benefit depend upon taxable income? Subject to ASC 740?

Transferable benefit if a change in ownership? Government description of programs? Purpose of

incentive? Application / Qualification process?

Questions to ask yourself (cont.)


Tax Holiday – Temporary reduction or exemption of a tax

Two types Entity qualifies (equivalent to nontaxable status) Requirement controlled by entity

Recognition of DTA is prohibited (ASC 740-10-25-35 and 36)

Re-measurement of DTAs upon Tax Holiday (ASC 740-10-30-8) Measure DTA using enacted rate expected to apply to

taxable income in the periods expected to be settled or realized

Tax holidays


If determined to be a carryforward or creates additional tax basis Record a Deferred Tax Asset (DTA)

Tax carryforward/add’l tax basis


Classification of the TIF Proceeds from a loan to be repaid? Taxable Grants? Contribution to capital – aiding construction? Tax exempt development reimbursement costs?

Tax increment financing (TIF)


ASC 740 applies to taxes based on income Can credit be received without regard to taxable

income? If yes, generally accounted for as government grant

(unless exception applies) Gov. Grants - Recognized into income when reasonable

assurance that [IAS 20.7] Entity will comply with conditions attached to the grant,

AND Grant will be received

Tax or grant accounting?


The grant is recognized as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. [IAS 20.12]

A grant receivable as compensation for costs already

incurred or for immediate financial support, with no future related costs, should be recognized as income in the period in which it is receivable. [IAS 20.20]

Grant accounting


Four common treatments: Reduction of costs Expenses or capitalized cost of an asset

Deferred credit Amortized over life of asset or period of grant

Revenue Other Income

GRANT ACCOUNTING - Ias 20


The tax effect of asset purchases that are not business combinations in which the amount paid for an asset differs from the tax basis of the asset should not result in immediate income statement recognition. The guidance requires deferred taxes to be measured

through an iterative calculation that results in a corresponding adjustment to the book basis of the related asset.

ASC 740-10-25-20 – Temporary difference if basis reduction is required under tax law.

ASC 740-10-25-51


XYZ Corp. receives a government grant for 30% of the purchase price of certain qualifying assets and XYZ must reduce its tax basis in those assets by 50% of the grant received. XYZ’s tax rate is 40%.

On 1 January 20X5, XYZ purchases $100 of

qualifying assets. The assets will be depreciated for both financial statement and tax purposes over a 5-year period.

Example (Slide 1)


Upon purchasing the qualifying assets, XYZ would record the following entry:

Dr. PP&E 70 Dr. Grant receivable 30 Cr. Cash 100

Example (slide 2)


In accordance with ASC 740, a deferred tax asset (DTA) is recognized for the $15 deductible temporary difference (i.e., the difference between the book basis of $70 ($100 purchase price less the $30 grant received) and the tax basis of $85 ($100 purchase price less $15, or 50% of the $30 grant received). A DTA of $10(See note below) would be recognized using the following entry:

Dr. DTA 10 Cr. PP&E 10 Note: A deferred tax asset is recognized for the difference between the financial statement carrying amount and the tax basis of the qualifying assets by applying the iterative formula (0.40 ÷ (1 - 0.40) = 0.66667). The deferred tax asset calculated using this formula is $10 ($15 x 0.66667)

Example (slide 3)


In subsequent years the following entries are recorded: Dr. Depreciation expense 12 Cr. Accumulated depreciation 12 To record annual depreciation expense over the book life of the asset ($60 book basis [$100 cost

less $30 grant less $10 DTA ÷ 5 years)

Dr. Income taxes payable 6.8 Cr. Current income tax expense 6.8 To record the benefit from depreciation ($17 annual tax depreciation expense [$85 tax basis ÷

5 years] x 40% tax rate]) Dr. Deferred tax expense 2 Cr. Deferred tax asset 2 To adjust the deferred tax asset based on the book and tax depreciation (40% tax rate x $5

[$17 tax depreciation—$12 book depreciation])

Example (slide 4)


Tax Return Schedule M-3 Schedule M-3

Schedule UTP

Disclosures / Reporting

Tax Footnote Current Provision Deferred Provision Rate Reconciliation

Uncertain Tax Positions Roll forward

Financial Statements

Financial Statements


Maines v. Commissioner1

Cash Subsidies treated as taxable income Amounts refunded (in excess of amount that reduced state tax

liability) was included in taxable income under IRC §61 EZ credits were not a recovery of prior year expenditures – include

in taxable income Sellable Credits

Receipt of credits was not an accession to wealth, BUT gain realized from selling them to a third party was capital gain2

Credits are not an accession to wealth as they are used to reduce the taxpayer’s own state liability

Election to Carryforward Under the constructive receipt doctrine, the ability of a taxpayer to

choose whether or not to utilize credit may give rise to current and deferred provision impact

1 Maines v. Commissioner 144 T.C. No. 8 (Mar. 11, 2015) 2 Tempel v. Commissioner, 136 T.C. No. 15 (April 5, 2011)

Federal implications (Cont.)


Questions?


©2016 True Partners Consulting LLC. All rights reserved. Printed in the U.S.A.

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IPT 2016 Annual Conference Current Environment … · 2016 IPT Annual Conference Current Environment . 3. ... Taxing authority has full knowledge of all relevant information ... No