ASC 740 Quarter 1 Round-Up

As companies move into reporting for the first quarter of 2022, there are several tax law changes and recent accounting pronouncements of which to be aware. While this is in no way an exhaustive list, the items below are expected to be impactful to a wide range of organizations.

Ongoing Items for 2022

A number of tax items from the Coronavirus Aid, Relief, and Economic Security Act and other COVID relief measures will continue to be impactful for 2022 reporting.

  • As part of the Consolidated Appropriations Act, meals purchased from restaurants are 100 percent deductible in 2021 and 2022. Companies will need to track or otherwise bifurcate their meal spending in order to properly claim the special deduction.
  • For companies that took advantage of deferring the employer portion of social security taxes in 2020, the second installment will be coming due in 2022 and will represent a substantial temporary difference for many taxpayers.
  • For companies that took advantage of the employer retention credit, the Internal Revenue Service has provided guidance on the disallowance of the associated costs. The guidance and required addback require a closer examination and may involve the use of estimates.
Domestic Law Changes

There are several sunsetting tax provisions taking effect in 2022.

  • For tax years beginning in 2022, the charitable contribution limit snaps back to 10 percent from the temporary 25 percent limitation.
  • For businesses, depreciation and amortization are no longer favorable additions to the §163(j) limit which will increase the restrictiveness of the limitation for many companies.
  • Under the Tax Cuts and Jobs Act, the bonus depreciation phase-out period begins in 2023 and will go down 20 percent each year until January 1, 2027.
  • In its third set of final regulations, the U.S. Treasury Department’s new foreign tax credit regulations proposed in November 2020 now go into effect in Q1 2022 for calendar year companies.
  • The mandatory §174 capitalization rule will create 5-year amortization for domestic expenditures and 15-year amortization for research performed outside of the U.S. This law change will have far-reaching impacts on many organizations and will require careful analysis for both the domestic impacts and the impacts on GILTI and FDII.
International Law Changes

A number of countries enacted changes to their tax rates.

  • Austrian law reduces the corporate tax rate to 24 percent in 2023 and 23 percent in 2024.
  • Turkish law reduces the corporate tax rate to 22 percent for 2022 and 19 percent for 2023.
Individual State Changes

Several U.S. states enacted law changes for the first quarter of 2022.

  • California’s legislature suspended its normal net operating loss deduction for businesses with income of $1 million or more and limiting business tax credits to $5 million annually for tax years 2020, 2021 and 2022.
  • Idaho reduced its flat corporate income tax rate and the top marginal individual income tax rate from 6.5 to 6 percent.
  • Utah legislators passed legislation to reduce the individual and corporate income tax rate from 4.95 to 4.85 percent retroactive to January 1, 2022.
ASU 2019-12 – ASC 740: Simplification Initiative

The Financial Accounting Standards Board’s Accounting Standards Update (ASU) on the ASC 740 simplification initiative has passed the mandatory adoption period for public companies and has also seen widespread early adoption by private companies. However, for private companies that have not early adopted, the standard is required to be adopted for fiscal years beginning after December 15, 2021 (i.e., calendar year 2022), and interim periods within fiscal years beginning after December 15, 2022 (i.e., calendar year 2023).

ASU 2021-08: Deferred Revenue in Business Combinations

The release of ASU 2021-08 transitions the accounting for deferred revenue acquired in business combinations from the ASC 805 fair value model to the ASC 606 revenue recognition model. This change will remove the current issue of disappearing revenue in business combinations and will allow acquirers to recognize more revenue post-acquisition than they would have under the previous standard. As such, early adoption is widely expected. For public entities, this is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2022 (i.e., calendar year 2023). For private companies, the standard is effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2023 (i.e., calendar year 2024).

Purchase Accounting Reminders

With a high volume of transactions happening currently, there are some common pitfalls seen in tax accounting for business combinations. Two frequently recurring issues are highlighted below.

  • When an acquiring company acquires a target and the acquisition causes a change in the valuation allowance profile with respect to the acquirors pre-existing deferred tax assets, any change in valuation allowance with respect to the acquirer is recorded through tax expense from continuing operations and is not recorded as part of business combination accounting.
  • Facilitative transaction costs are typically required to be capitalized for tax purposes. When companies have acquired goodwill and are performing the Component 1 and Component 2 Goodwill analysis, capitalized transaction costs should not be part of the analysis. Transaction costs are typically expensed as a period cost for financial statement purposes and are outside the scope of ASC 805. As such, the effects of the tax capitalization should be part of the pre or post transaction period provision and should not be part of business combination accounting.
Interim Reporting Reminders

As companies prepare for Q1 interim reporting, there are two common pitfalls concerning the estimated annual effective tax rate (EAETR) that are worth highlighting.

  • A change in the valuation allowance related to the current period’s activity is included in the EAETR. Changes in the valuation allowance related to discrete items or changes in judgment regarding future activity should be treated as a discrete item for the period.
  • The EAETR is for continuing operations only. Discontinued operations are accounted for as discrete outside of the EAETR.

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