5 Key Income Tax Provision Issues for Businesses

Tax | September 2, 2015 | Josh Walther

U.S. generally accepted accounting principles requires a company to calculate an income tax provision to report on its various income tax accounts, including taxes payable, income tax expense, and deferred tax assets and liabilities.

Having assisted many clients with their income tax provisions, I have noticed particular areas of concern that often arise. The following list highlights those issues and briefly explains what businesses should do in preparation for the income tax provision analysis in these areas.

  1. Valuation Allowance
    A valuation allowance (VA) is recorded against the deferred tax asset (DTA) to report the DTA that is more likely than not to be realized. The VA analysis is highly subjective and can present challenges for many companies. Although a high emphasis is often given to cumulative income or losses, all positive and negative evidence should be considered when determining the need to record a VA. Additionally, if a company changes its VA position, it should clearly explain the reasoning; if a company releases its VA, it should be able to provide support that the timing of the release is appropriate.
  2. Purchase Accounting
    The income tax accounting for a business combination can be complex and varies widely depending on the specific fact pattern. There are many income tax accounting issues a company needs to consider including adjustments to the deferred tax assets and liabilities, impact on the valuation allowance, and applicable footnote disclosure.
  3. Stock Based Compensation
    If a company has equity incentive plans, it should consider the impact on its income tax provision. How the plan is structured impacts the income tax consequences and causes variations in the related income tax accounting treatment. Companies should calculate the necessary DTAs related to stock based compensation, and they need to carefully track the additional-paid-in capital pools for windfall tax benefits.
  4. Provision to Return Differences
    It is important for companies to analyze provision to return (PTR) differences. Since the income tax provision is an estimate, differences often exist when comparing the taxes reported in subsequently filed tax returns. Companies should account for these differences when preparing the following year’s income tax provision. The goal should be to minimize the needed PTR adjustment. Given a large enough adjustment, the question arises whether a financial statement restatement is needed.
  5. Financial Statement Presentation and Disclosure
    The income tax provision can impact several areas of the financial statements, including the balance sheet, income statement, statement of cash flows and footnote disclosures. A company should focus on appropriately including the required presentation and disclosures in its financial statements. When presenting the DTAs on the balance sheet, a VA should be allocated based on the gross DTAs. There are many required disclosures related to the income tax provision; when drafting the footnotes, examples of information a company needs to consider include its current and deferred income tax expense, deferred tax assets and liabilities, valuation allowance details, stock based compensation, business combinations and uncertainty in income taxes.

Every company is unique, so these are not issues that will affect everyone, nor is this an exhaustive list of income tax provision considerations. However, many of my clients discover that when they do come across these areas of concern, they are not equipped with the in-house expertise to review and resolve the issues.

Therefore, take this list as a “what to look for.” That way, the next time you are required to report on your accounts, you’ll have some idea as to what may be needed and how to handle it.

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