Will Accounting for Income Taxes Become Simpler in the Future?

In furtherance of its overall “Simplification Initiative”, the FASB issued a proposed Accounting Standards Update (ASU) that is intended to reduce some of the complexity found within ASC 740 “Income Taxes”. The proposal would hopefully simplify accounting for income taxes in many areas.

What type of Simplifications are being proposed? Below are some of the highlights:

  • Franchise Taxes: The proposal requires that franchise tax based on income be included in the “income tax provision” and any incremental amount which is non-income-based tax be reported ”above the line”. So for example, any New York Capital Taxes would be reported above the line.
  • Goodwill: The proposal requires a company to evaluate whether a step up in tax basis of goodwill should be considered part of the initial recognition of book goodwill or a separate transaction. To the extent that the step-up relates to the initial recognition of book goodwill, no deferred tax asset would be recorded except for any amount of newly deductible goodwill that exceeds the balance of book goodwill. If the step up relates to a separate transaction, a deferred tax asset would be recorded for the amount of the newly deductible goodwill. The intent is to better reflect the economic consequences of separate transactions.
  • Separate Entity Financial Statements: If a single-member LLC is issuing separate company financial statements, the proposal would eliminate the requirement to allocate consolidated current and deferred income taxes in its separate financial statements, but it may elect to do so.
  • Interim Reporting: If a Company issues quarterly financial statements, the proposal requires the annual effective tax rate to reflect changes in enacted tax laws or rates for interim periods, beginning with the period of enactment.

There are also some proposals related to the Elimination of Exceptions including:

  • Removal of the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other components (for example, discontinued operations or other comprehensive income)
  • If a foreign subsidiary becomes an equity method investment, the amount of outside basis difference for which deferred taxes were not provided for would no longer be frozen and a deferred tax liability would be recorded in the period of change
  • On the other hand, if an equity method investment becomes a foreign subsidiary, the deferred tax liability for the amount of the outside basis difference would no longer be frozen and an entity could assert that the undistributed earnings are indefinitely reinvested and therefore eliminate the deferred tax liability.
  • For interim reporting, if an entity’s year-to-date loss exceeds the anticipated loss for the year, there will no longer be a limitation on the amount of benefit that can be recorded in an interim period.

When does this take affect?

Some proposed amendments are expected to be applied on a retrospective (or modified retrospective) basis with others being applied on a prospective basis. The effective date of the ASU will be determined after the FASB considers the comments it receives. Comments are due by June 28, 2019.

If you would like to discuss the FASB’s proposed ASU in more detail, please fill out the form below.

Authors: Paul Helderman, CPA, MST, Partner and Zsia Rosmarin, CPA, MS, Partner

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