In December 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. US Generally Accepted Accounting Principles require that changes in tax rates be effective in the period of enactment. Therefore, all entities are required to account for these changes in their financial statements for fiscal years ending after December 22, 2017. Some of the highlights of the TCJA include:
- A flat C corporation tax rate of 21% was established. This replaces rates that ranged from 15% to 35%. The corporation alternative minimum tax (AMT) was eliminated.
- Earnings generated by foreign subsidiaries on which US income tax is currently deferred were made subject to a one-time transition tax.
- The maximum net operating loss (NOL) carryforward deduction in tax years commencing after 2017 will be reduced to a percentage of the taxable income. NOLs created in any tax years commencing after December 31, 2017 can be carried forward indefinitely to offset 80% of taxable income, but carrybacks were repealed. For existing NOLs, the rules remain the same. These losses can still be carried back two years and forward 20 years, and there is no taxable income limit to usage of such pre-2018 losses.
- The deduction for net interest expense by US companies was limited.
- Starting in 2018, Section 199, the domestic manufacturing deduction, was repealed.
- The costs of new investments in certain qualified depreciable assets made after September 27, 2017 are eligible for a 100% first-year bonus depreciation.
The Financial Accounting Standards Board (FASB) also issued Accounting Standards Update (ASU) 2018-02 in February 2018 as a result of the TCJA. The purpose of this was to ease the concerns of stakeholders in regard to entities that are required to apply Topic 220, Income Statement-Reporting Comprehensive Income. The update allows reclassifications from accumulated other comprehensive income into retained earnings for stranded tax effects that directly resulted from the passage of the TCJA. This ASU is effective for entities with fiscal years beginning after December 15, 2018.
The FASB also issued several staff question-and-answer memos in an effort to bring further clarity to their position on implementation issues regarding the TCJA. Some of the conclusions are as follows:
- The FASB does not object to entities applying Securities and Exchange Commission Staff Accounting Bulletin (SAB) 118, which provides guidance for entities that are unable to complete their accounting for income tax effects of the TCJA in the period of enactment. However, if an entity does apply SAB 118, it should apply all of its relevant aspects.
- The FASB believes the tax liability on the deemed repatriation of earnings should not be discounted.
- The FASB believes that any AMT credit carryforwards presented as a deferred tax asset should not be discounted.
These highlighted items should be considered when entities are assessing whether the TCJA has any impact on their accounting and financial statement reporting.
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