Income taxes

The basics of income tax accounting

Under ASC 740, the amount of income tax expense an entity must record in each period does not simply equal the amount of income tax payable in each period. Rather, ASC 740 requires an entity to record income tax expense in each period as if there were no differences between (1) the timing of the recognition of events in income before tax for US GAAP purposes and (2) the timing of the recognition of those events in taxable income.

In accordance with ASC 740-10-10-1, an entity’s overall objectives in accounting for income taxes are to (1) “recognize the amount of taxes payable or refundable for the current year” (i.e., current tax expense or benefit) and (2) “recognize deferred tax liabilities [DTLs] and assets [DTAs] for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns” (resulting in deferred tax expense or benefit). An entity’s total tax expense is generally the sum of these two components and can be expressed as the following formula:

Legislative and economic setting

In 2017, we saw sweeping tax reform unfold in the United States. The Tax Cuts and Jobs Act (the “2017 Act”) introduced a host of new concepts, including a one-time transition tax on unrepatriated foreign earnings, along with a new tax on global intangible low-tax income (GILTI) inclusions, the base erosion anti-abuse tax (BEAT), and more restrictive interest limitations under IRC Section 163(j). In some respects, however, the 2017 Act simplified the accounting under ASC 740 because assertions entities needed to make to avoid recording DTLs for unremitted foreign earnings now primarily apply only to ancillary taxes (i.e., withholding and state).

In 2020, the unstable economic environment brought its own set of challenges related to the ability to successfully forecast taxable income, both for establishing an entity’s annual effective tax rate used for calculating interim tax provisions and for assessing the realizability of net operating loss carryforwards and other attributes.

Now, in late 2022, two pieces of legislation with significant tax-related provisions have been enacted. The CHIPS Act of 2022 (HR 4346), signed into law on August 9, 2022, establishes an advanced manufacturing investment credit under new IRC Section 48D. The Inflation Reduction Act (HR 5376), signed into law on August 16, 2022, includes (1) a 15 percent book minimum tax (corporate alternative minimum tax) on the adjusted financial statement income of applicable corporations; (2) a plethora of clean-energy tax incentives in the form of tax credits, some of which have a direct-pay option or transferability provision; and (3) a 1 percent excise tax on certain corporate stock buybacks.

For additional details and ASC 740 considerations related to the tax-related provisions of these new pieces of legislation, see Deloitte’s Tax Alert Emerging ASC 740 Issues: Recent Tax Legislation.

Continue your income tax learning

For a comprehensive discussion of the income tax accounting guidance in ASC 740, see Deloitte’s Roadmap Income Taxes.