With a tax reform package nearly complete, tax and financial reporting experts are alerting companies to get their tax records in order to prepare for a flurry of year-end transition activity.
The House of Representatives and the Senate are finalizing the reconciliation of their bills, and the provisions are “pretty similar,” says John Gimigliano, a tax principal at KPMG. Early reports suggest the deal landed at a 21-percent corporate tax rate, although the House would have it take effect Jan. 1, 2018, and the Senate was stumping for a Jan. 1, 2019, effective date.
Skeptics may notice a parallel to the lead up to health care reform, when Republicans ultimately could not garner enough votes to put a measure into law. This is different, says Gimigliano. “This is more of a natural issue with Republicans,” he says “They’re more comfortable with tax issues and tax reform. It’s a more natural playing field for Republicans where they feel more confident.”
Under U.S. GAAP, companies will be required to report the effects of any new tax legislation in the period any law is enacted, said Ashby Corum, partner on the accounting side of taxes at KPMG. That means if Congress finalizes a bill and it is passed into law before the end of the year, which seems almost certain, calendar year-end companies will need to reflect it in their fourth quarter and year-end financial statements.
If the tax rate declines from 35 percent to something as low as 20 percent, that will have a significant effect on any deferred tax assets and deferred tax liabilities currently sitting on corporate balance sheets, says Corum. Companies need to gather up tax records associated with those various temporary differences between book and tax reporting and prepare to remeasure those assets and liabilities, he says.
If the effective date is ultimately set for some later date — like Jan. 1, 2019, as the Senate would have it — that suggests companies may need to segregate DTAs and DTLs into separate buckets. Some would be remeasured at a new lower rate and some would remain on the books at the current rate, depending on the timelines associated with specific temporary tax differences, says Corum.
Both the House and Senate bills would tax foreign earnings of U.S. companies, says Corum, but at a reduced rate, with an option to pay taxes on earnings held offshore over an extended period of time. With such earnings currently not subject to U.S. tax until brought into the United States, and with that policy in place since the late 80s, companies will need to gather up records associated with those historic earnings as well.
“Just computing the obligation, or the amount of the liability, will be a challenge,” says Corum. “That’s roughly 30 years worth of data that’s been accumulating.” The final legislation is likely to tax earning held in cash versus those held in liquid or illiquid assets at different rates, he says. “Scrubbing 30 years worth of data could be quite an effort for some companies.”
Additional areas for study include executive compensation and net operating losses, says Corum. The final tax reform measure is likely to change the deductibility of certain types of compensation for named public company officers, which would eliminate certain deferred tax assets, he says. The final package is also likely to change the way net operating losses can be carried back into prior tax years and forward into future tax years, which also would affect DTAs and DTLs currently sitting on balance sheets, he says.
Corum and Gimigliano are suggesting companies take some measures now to prepare for the seismic shift that is likely to occur. And even if it doesn’t happen by the end of December, it’s still likely to happen early in 2018, so the effort will not be wasted, they say.
While the financial reporting aspects of the change may be daunting enough, even altering the way companies determine their tax obligations will be an effort, says Gimigliano. “Tax departments have procedures and spreadsheets in place for how they calculate their taxes and do their provisions,” he says. “It’s not too soon to think about how you’re going to measure Q1 taxes if this becomes law.”