Companies Face Tricky Task in Applying New Rate to Tax Deferrals

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By Steven Marcy

The Dec. 22 enactment date of the U.S. tax overhaul can pose a daunting task for public companies trying to apply the new corporate tax rate for their deferred tax assets and deferred tax liabilities for the last nine days of 2017.

“Entities that remeasure their deferred tax positions using balances as of Dec. 31, 2017, will need to consider the impact of changes in deferred tax positions between the enactment date of Dec. 22, 2017, and Dec. 31, 2017, when they determine the effect of tax rate changes,” Grant Thornton International Ltd. tax partner April Little said Feb. 6 in a joint webcast with Bloomberg Tax.

“Any activities that may have a material impact on the deferred tax positions recorded to the financial statements during that brief period should be recorded at the 21 percent rate as opposed to the 35 percent rate and then remeasured at the 21 percent rate,” Little said. “Call it a practical expedient,” she said of the remeasurement process.

The types of transactions occurring in the nine-day period may include “business combinations, purchases of material new assets with accelerated depreciation, large issuance of share-based compensation, and maybe remeasuring a pension liability based on actuarial information,” Little said.

Companies must be careful that they comply with the Financial Accounting Standard Board’s rule for income tax accounting when applying the effect of a change in income tax rates to deferred tax positions, Grant Thornton senior tax manager Nola Showers told the webcast.

FASB’s Accounting Standard Codification 740 “requires entities to adjust the deferred tax assets and liabilities” that existed on Dec. 22 “using the newly enacted rates for the periods when they are expected to be realized,” Showers said.

In calculating if they have a deferred tax asset, companies must also check to see if they must make a valuation allowance—a reserve they must set aside if it appears a better than a 50-50 chance exists that a tax authority won’t grant a projected future tax break—Showers said.

The new tax law “has brought sweeping changes to existing tax legislation, so deferred tax positions impacted by tax reform will need to be reevaluated” for the likelihood of a company actually collecting them, Showers said.

To contact the reporter on this story: Steven Marcy in Washington at smarcy@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

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