With tax reform a reality, public companies are now facing new business planning opportunities and new tax provision and reporting obligations that create a mountain of transition work.

And with the pre-Christmas signing of the bill into law, the Securities and Exchange Commission issued almost simultaneously guidance indicating it will give companies some time to sort out how they will be affected by the new law.

The Tax Cuts and Jobs Act ushers in the biggest change in the U.S. tax code since the mid 1980s. Key provisions of importance to public companies begin with a whopping reduction in the corporate tax rate to 21 percent coupled with a long list of new rules on what’s deductible and what can be carried back into earlier tax years or forward into future tax years. That means companies need to revamp how they calculate their tax provisions and re-measure deferred tax assets and deferred tax liabilities currently sitting on balance sheets.

Perhaps equally significant, the tax law creates a monumental shift in taxation of foreign earnings. Potentially decades worth of accumulated foreign earnings held offshore will be subject to a one-time transition tax, at different rates for different classes of assets, and companies will face a new approach to taxation of foreign earnings going forward. “This changes the way companies are going to think about and do business,” says Yosef Barbut, a partner at BDO USA. “This is a huge reform.”

From a tax planning perspective, companies need to think almost as if the slate has been wiped clean. “If you step back and look at the big picture, this could have the potential of changing the strategic thinking around where we do things and where we source income to,” says Barbut. “It’s an element of the supply chain coming back to the U.S., so that really is the big picture.”

While tax departments are buzzing with the implications for tax planning and business planning more broadly, the most pressing immediate priority for preparers is to get a handle on how it affects financial reporting obligations, the scope of which is likely enormous for most companies.

“In this situation, we believe issuers and investors alike would benefit if the Commission or SEC staff provided guidance on the circumstances under which a delay in reporting may be appropriate, and the appropriate process to follow should individual companies need a delay from any of the Commission’s reporting requirements.”
Neil Bradley, Chief Policy Officer, Chamber of Commerce

President Trump signed the tax bill into law on Dec. 22, which means that companies will be required under U.S. GAAP to report the effects of that legislation in the period of enactment. For calendar-year companies, that means reporting in fourth-quarter and year-end financial statements. Shortly after the bill was signed, the SEC issued Staff Accounting Bulletin No. 118 and updated its Compliance and Disclosure Interpretations to indicate it will accept some measure of estimation and disclosure over full GAAP compliance in light of the magnitude of the change and the short time to comply.

The U.S. Chamber of Commerce and other business groups had appealed to SEC Chairman Jay Clayton to consider giving companies some relief with respect to the year-end reporting obligation. Neil Bradley, senior vice president and chief policy officer at the Chamber, had sent a letter to Clayton pointing out that some public companies, particularly those with global operations or complex reporting structures, may find it difficult to do much more than discuss the tax consequences in qualitative terms in their risk factor disclosures and management discussion and analysis.

Bradley said companies might have difficulties providing quantitative details within their respective filing deadlines. The largest public companies must file fourth-quarter financials within 40 days of the end of the quarter and year-end financials within 60 days of the end of their annual reporting period. That means those companies must be prepared to report as early as mid-February the full impact of the new tax law in GAAP-compliant, audit-ready quantitative detail.

“In this situation, we believe issuers and investors alike would benefit if the Commission or SEC staff provided guidance on the circumstances under which a delay in reporting may be appropriate, and the appropriate process to follow should individual companies need a delay from any of the Commission’s reporting requirements,” Bradley wrote. The SEC's guidance gives companies some breathing room.

"Allowing entities to take a reasonable period to measure and recognize the effects of the Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors," said Wes Bricker, chief accountant at the SEC. SEC commissioners even released a joint statement thanking the staff for issuing "practical guidance that will assist issuers in their compliance efforts and provide for an orderly implementation process while ensuring the protection of investors."

That doesn't ease the ultimate amount of work to be done to transition to the new tax structure and reflect it in financial reporting. David Sites, a partner in the Washington national tax office at Grant Thornton, says companies need to gather and digest a great deal of information related to deferred tax assets and deferred tax liabilities currently residing on balance sheets to determine which must be re-measured at new tax rates and which must be reduced with valuation allowances because they are no longer allowed under the new law.

Summary of key provisions of the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act makes the following key changes to US tax law:
Establishes a flat corporate income tax rate of 21 percent to replace current rates that range from 15 percent to 35 percent and eliminates the corporate alternative minimum tax (AMT)
Creates a territorial tax system rather than a worldwide system, which will generally allow companies to repatriate future foreign source earnings without incurring additional U.S. taxes by providing a 100-percent exemption for the foreign source portion of dividends from certain foreign subsidiaries
Subjects foreign earnings on which U.S. income tax is currently deferred to a one-time transition tax
Creates a “minimum tax” on certain intangible foreign earnings and a new base erosion anti-abuse tax (BEAT) that subjects certain payments made by a U.S. company to a related foreign company to additional taxes
Creates an incentive for U.S. companies to sell goods and services abroad by effectively taxing them at a reduced rate
Reduces the maximum deduction for net operating loss (NOL) carryforwards arising in tax years beginning after 2017 to a percentage of the taxpayer’s taxable income; allows any NOLs generated in tax years beginning after Dec. 31, 2017, to be carried forward indefinitely; and generally repeals carrybacks
Eliminates foreign tax credits or deductions for taxes (including withholding taxes) paid or accrued with respect to any dividend to which the new exemption (the 100-percent exemption for the foreign source portion of dividends from certain foreign subsidiaries) applies, but foreign tax credits will continue to be allowed to offset taxes paid for any foreign income taxed to the U.S. shareholder and income taxes paid by foreign branches to another country
Limits the deduction for net interest expense incurred by U.S. corporations
Allows businesses to immediately write off (or expense) the cost of new investments in certain qualified depreciable assets made after Sept. 27, 2017, but would be phased down starting in 2023
Eliminates or reduces certain deductions, including deductions for certain compensation arrangements; also eliminates exclusions and credits and adds other provisions that broaden the tax base
Source: EY

With respect to foreign earnings, companies must assemble their records on earnings and profits overseas that have not been repatriated, so no brought into the United States and taxed, and must calculate the tax they will owe under the new law. That equation will be enormously complicated because earnings held in cash will be subject to a different tax than earnings held in other assets.

In addition, the law requires companies to calculate their tax due as of Nov. 2, 2017, the day the House of Representatives released their first draft of the bill, and the end of the year, paying the higher balance. That was a provision to curb any shifting of assets companies might have pursued late in 2017 as they anticipated the effects of a year-end change in tax law, says Sites.

“That puts a big burden on taxpayers,” he says. Nov. 2 is a relatively arbitrary date from a financial reporting perspective, but one that will be important to compliance ultimately. “Companies typically don’t calculate earnings on foreign subsidiaries as of Nov. 2, but now they need to know that number to comply.”

Matthew Himmelan, a national consultation partner on tax at Deloitte & Touche, says he’s advising companies to think about the immediate priorities in four buckets, based on the provisions of the taw law. The first big area is the work to be done around the rate reduction from 35 percent to 21 percent.

Companies need to re-measure their deferred tax benefits and arrive at a figure that will go through the income statement, says Himmelman. Where a company’s fiscal year does not align with the tax year, that will produce a blended effective rate and will require some scheduling, he says. While the details of that process will differ company to company, “suffice it to say everyone will have to make adjustments,” he says.

The next big work area is in digesting the rules on carrying net operating losses back into prior tax years or forward into future tax years, a common maneuver that enables companies to use losses to offset taxable gains, says Himmelman. NOL carryforwards are subject to new limitations under the new law, and deductions on expenses are more limited. The alternative minimum tax also goes away, so companies need to re-assess any DTAs or DTLs with those provisions in mind as well.

On the international front, companies need to gather their records so they can calculate the transition tax they will have to pay on unrepatriated foreign earnings, Himmelman said. “There is a current tax in the United States irrespective of whether the money has been repatriated to the U.S. or not,” he says.

The calculation will be complex not only based on how those earnings are currently held, but also how earnings from different entities will be aggregated and how any foreign tax credits might apply. Those numbers also will flow through the income statement, says Himmelman.

Also on the international front, companies need to study extensive new provisions related to profits earned overseas going forward and payments made to affiliate entities overseas, as the rules are changing significantly in that area as well. “There are questions around whether there are any deferred tax ramifications that need to be recorded with respect to those provisions in the way,” says Himmelman.