How the Tax Reform Affects Your Company’s Financial Statement
Some of the tax reform provisions will likely significantly affect financial statements. A few things that likely will be impacted by the reduction in the corporate tax rate to a flat 21 percent include the income tax provision, deferred taxes and valuation allowance assessment.
Below are a few items to consider now:
- Deferred taxes – effective 1/1/2018, the Act reduces the corporate tax rate to 21 percent. Deferred taxes will be remeasured as of the enactment date (12/22/2017) and the change will be recognized in income tax expense from continuing operations.
- Valuation allowance - several new provisions are likely to affect valuation allowances. These provisions include the 100 percent dividends received deduction that may affect the realizability of foreign tax credits, cost recovery provisions that accelerate depreciation on depreciable and real property, interest expense provisions that limit annual interest deductions and the use of disallowed interest carryforwards and annual limitation on the use of net operating loss (NOL) carryforwards.
The law reduces the corporate tax rate to 21 percent effective January 1, 2018. The rate reduction has an immediate effect on deferred tax balances for companies with December 2017 year ends.
A company must remeasure its deferred tax assets and liabilities to reflect the effects of enacted changes in tax laws or rates at the date of enactment, i.e. the date the President signed the law, even though the changes may not be effective until future periods. The effect of the remeasurement is reflected entirely in the interim period that includes the enactment date and allocated directly to income tax expense (benefit) from continuing operations. The effect on prior year income taxes payable (receivable), if any, also is recognized as of the enactment date.
A fiscal year-end company may need to adjust its estimated annual effective tax rate.
The tax effect of changes in tax laws or rates typically is recognized in the estimated annual effective tax rate beginning in the interim period that includes the effective date. However, the legislation requires a company to use a blended rate for its fiscal 2018 tax year by applying a pro-rated percentage of the number of days before and after the January 1, 2018 effective date. As a result, the change in the tax rate becomes administratively effective at the beginning of the taxpayer’s fiscal year and therefore will be factored into the estimated annual effective tax rate in the period that includes the December 22, 2017 enactment date.
A fiscal year-end company also should schedule the reversal of enactment date temporary differences to determine which will reverse under the blended rate in fiscal 2018 and which will reverse once the 21 percent rate is fully effective.
Note that the FASB is meeting on January 10, 2018 to discuss implementation issues, which may have an impact on the above.
Kelli is a Vice President in the Assurance Services Group and is a key member of the firm’s not-for-profit core group. She oversees the firm’s quality control procedures. In addition, she is involved with researching technical accounting issues.