Income Tax Provisions 201: Class Is Back in Session

Led by EisnerAmper tax partners Allie Colman and Tom Cardinale, the “Tax Provisions 201” webinar expanded on the fundamentals of “Tax Provisions 101,” which was taught in February. The topics ranged from emerging issues, such as R&D capitalization under IRC Section 174, to classics including the tax treatment of stock-based compensation and the complexities of state tax conformity. The below provides a brief summary of other key topics discussed:

Rate Reconciliation

Tom detailed that the rate reconciliation is a wonderful tool for an executive or other readers of  financial statements to understand the drivers of the tax provision. While computationally, the rate reconciliation offers the detail of items that cause the effective tax rate to differ from the statutory rate, it also allows the reader to quickly identify drivers of the provision. Common rate reconciling items are permanent differences, state taxes, valuation allowance, foreign tax expense and tax credits. The rate reconciliation is required for public companies and can be disclosed either via dollar amount or as a percentage of pre-tax book income.

Income Taxes Payable/Receivable

Allie mentioned that the income tax payable/receivable can often confuse taxpayers at the year-end tax provision. While the payable may seem like a more basic concept, there are quite a few moving pieces to consider such as reconciling estimated, extension, return and assessed tax payments; recording the over or under accrual-related-to provision to return differences; and analyzing general ledger tax accounts for misplaced entries.

Some of the best practices that companies can utilize to manage this exercise are to run all tax payments, including notices, through the balance sheet, inputting memo descriptions within the GL system to describe what the payment made relates to, and creating dedicated tax accounts for income and other tax types.

Naked Credits

One of the more advanced topics covered during the webcast was “naked credits.” Typically, naked credits occur when companies that have completed an asset purchase, or stock transaction treated similarly, are in a valuation allowance position. Naked credits, however, can occur in other situations, typically because of an indefinite-lived intangible asset.

To identify a naked credit, schedule out the expected timing of the reversal of existing temporary timing differences to identify if the periods of reversal among deferred tax assets and liabilities align. Due to the Tax Cuts and Jobs Act, interest limitations and certain net operating loss carryforwards are now subject to an indefinite life, which can be used to offset indefinite-lived deferred tax liabilities in certain circumstances—providing some taxpayers with relief from naked credits.

There webinar covered additional key considerations as we approach Q4 of 2022:

• Corporate charitable contributions are limited to 10% in 2022 (down from 25% in 2021).
• This is the last year of the 100% bonus depreciation allowance (down to 80% in 2023).
• Business meals are 100% deductible in 2022.
• Section 163(j), subject to EBIT, depreciation and amortization are no longer additions.

These topics and more are covered at length in the webcast:

Tax Provision Preparation 101 On-demand (eisneramper.com)

Tax Provisions 201