5 Considerations for Year-End Tax Provision Reporting

As the year concludes, the party is over for companies that have income tax provision reporting requirements. In the first three quarters of the year, the guiding principle of tax provision accounting standards, ASC 740, along with some help from the SEC, allowed for minimal reporting obligations in addressing tax reform. However, in the last quarter, companies are required to disclose far more than just current tax expense in their financial statements. Calculating full-year current and deferred taxes is a time-consuming task, and integrating the new tax reform provisions will only multiply the complexity and time needed to record the changes.
 
Even as many are still trying to understand the new tax law, businesses should not delay. Proactively assessing reporting requirements, in light of new tax law provisions, is essential to avoid a bigger headache or time crunch later. Here are key guidelines to ensure accurate and timely reporting of annual tax expenses, as well as current and deferred taxes.

1. Reporting Global Intangible Low-Taxed Income (GILTI)
   Tax treatment of foreign earnings were among the most impacted by tax reform. One major addition is reporting taxable income from any GILTI inclusion if the company has a controlled foreign corporation with earnings and profits. Starting in 2018, such foreign earnings are taxed at the U.S. parent level after special deductions and credits are considered (if qualified). In recording GILTI for tax provision purposes, companies are given a choice based on their accounting policy—to treat the income as a current period expense in the year GILTI is incurred, or include the GILTI amounts in their deferred taxes.
2. Weigh state response to tax reform provisions
   With so much focus on the federal side of tax reform, state response to many provisions is easy to overlook. While many jurisdictions are still assessing whether to decouple from some federal provisions, a few states have acted more swiftly. New Jersey, for instance, recently became one of the first states to declare it would conform to federal rules on taxing GILTI. California is currently in conformity with the federal tax code as of Jan. 1, 2015, so technically it does not recognize any of the new 2018 tax reform provisions unless the state passes an updated coupling law. As such, companies should stay apprised of state and local legislative actions, especially since many states would have to make the changes retroactive to Jan. 1, 2018. When it comes to the state side of income tax provisions, a state-by-state legislative review may be needed to ensure accurate reporting.
3. Consider the new Foreign Derived Intangible Income (FDII) deduction
   In many respects, FDII is the opposite of GILTI, since it rewards U.S.-based companies (corporations only) with a new deduction if they have considerable export sales rather than having foreign subsidiaries to control and source such revenues. This feature of tax reform allows U.S. taxpayers to get a 37.5% deduction on the adjusted income of their adjusted export income. The existence of this benefit would lead to a new permanent adjustment to record for the tax provision. Overall, the FDII deduction has been one of the more overlooked areas of tax reform, so any corporation with export sales should thoroughly explore this benefit.
4. Track new tax deferred tax assets under IRC Sec. 163(j)
   Companies must now factor in the new annual business interest deduction limitation, based on approximately 30% of taxable earnings before interest, tax, depreciation, and amortization (or a tax version of EBITDA). Any unused excess is now treated as a carryforward and becomes a deferred tax asset that must be tracked in deferred tax asset reporting. To reduce exposure, highly leveraged companies, with significant amounts of non-deductible interest, should check alternate financing options, such as raising new capital, bringing in new investors, repatriating overseas earnings and profits, and securing intercompany loans at lower rates.
5. Don’t overlook “naked debits.”
   Historically, loss companies with a full reserve on their deferred taxes, with goodwill or indefinite lived intangibles from a previous asset purchase, had to record a deferred tax liability, commonly called the “naked credit.” Because 2018 net operating losses and carried-over interest expense have an indefinite life under the new tax law, the same fully reserved loss company may now have naked debits to book that may offset an existing naked credit, limited to its statutory usage (for example, 80% for NOLs). This area adds another complex component to provision reporting that has arisen as a result of tax reform.

Because many new tax reform provisions are complex and burdensome, companies should address them now by conducting tailored analyses where they may be material, including having a professional study performed on a particular area, such as a GILTI or FDII. Whether facing an SEC or bank deadline, the last thing a business wants is to delay financial statement issuance or be left spinning its wheels to figure out tax reform impacts to these provisions.

Business Tax Quarterly - Winter 2018

• Business Tax Quarterly Executive Summary
• 4 Tips to Navigate New Meal and Entertainment Rules
• 5 Considerations for Year-End Tax Provision Reporting
• Business Tax Quarterly Suggested Readings