Corporate Tax Accounting
for Regulated Telcos
• The material appearing in this presentation is for
informational purposes only and is not legal or
accounting advice. Communication of this information is
not intended to create, and receipt does not constitute, a
legal relationship, including, but not limited to, an
accountant-client relationship. Although these materials
may have been prepared by professionals, they should
not be used as a substitute for professional services. If
legal, accounting, or other professional advice is
required, the services of a professional should be
sought.
MossAdams
• Firm established in 1913
– Serving telecom clients since 1957
• The 12th largest accounting & consulting firm in
the U.S.
– 250 Partners / 2,000 Staff
– 22 Offices – West Coast, Kansas City
• Telecom specialists based in Seattle, Spokane,
Stockton, Vancouver, & Kansas City
Housekeeping
• Class Schedule
– 9:00 am to 4:00 pm
• Facilities
– Restrooms
– Telephones
• CPE and Evaluation Forms
• Binder
• Participate
CourseOutline
• Income Tax Overview/Effect on Rate Base
• Topic 740 (FAS 109) Basics
• Case Study
– Common Permanent Differences
– Common Temporary Differences
– Plant Accounting (Temporary Differences) from a Tax
Perspective
– Effect of Tax Calculations on Rate Base
• Topic 740 (FAS 109) Additional Topics
• Other Tax Considerations
• Topic 740 re: FIN 48 – Accounting for Uncertainty in Tax
Positions
IncomeTaxOverview/
EffectonRateBase
IncomeTaxOverview
• Part 32
• Income tax accounting
– Cooperative telco – discussed in depth in another
course
– Commercial telco
• Deferred income taxes
• Settlement issues
WhatisPart32?
• Uniform System of Accounts (USOA)
– Added to Code of Federal Regulations May 15, 1986
• Purpose of regulated system of accounts
– Provides comparable accounting information
– Provides accounting information according to GAAP
– Standardizes accounts & financial reports
Part32
See Separate Part 32
RateBase
Amounts Included in Typical Rate Base
A/C #
2001
2002
2003
2005
1220
3100
3200
3600
4310
4100, 4340
4040
Description
Telecommunications plant in service
Property held for future use
Telecommunications plant under construction
Telecommunications plant adjustment
Materials and supplies
Accumulated depreciation
Accumulated depreciation - held for future use
Accumulated amortization - other
Other long term liabilities
Deferred income taxes
Customer deposits
Cash working capital
xxxxxxxxx
xxxxxx
xxxxxxx
xxxxx
xxxxxx
(xxxxxxx)
(xxxxx)
(xxxxx)
(xxxxxxx)
(xxxxxxx)
(xxxxxxx)
xxxxx
Rate Base
xxxxxxxxxx
PART 32 ACCOUNTING
Rate Base = $11,300,000
Expenses & Taxes = $6,175,000
PART 64 PROCESS
Nonregulated
Regulated
RB = $300,000
E&T = $175,000
RB = $11,000,000
E&T = $6,000,000
PART 36 PROCESS
Intrastate
RB = $2,750,000
E&T = $1,500,000
RR = $1,809,375 @ 11.25%
Interstate
RB = $8,250,000
E&T = $4,500,000
RR = $5,428,125 @ 11.25%
SEPARATIONS PROCESS
Local
$498,000
Access
$1,300,000
PART 69 PROCESS
Nonaccess
$11,375
Access
$5,393,000
Nonaccess
$35,125
NonregulatedInvestments
• What’s different for telephone companies?
– Regulated vs. nonregulated
• Are there joint & common costs?
– If yes:
• Assets recorded in regulated accounts
• Revenues recorded in A/C 5280
• Expenses recorded in regulated accounts
– If no:
• Assets recorded in A/C 1406
• Revenues & expenses recorded in A/C 7990
AffiliatedTransactions
• No subsidization of nonregulated by regulated
• Sales of assets regulated to nonregulated
affiliate
– Tariffed rate
– Prevailing price
– Greater of NBV or FMV
• Sales of assets affiliated to regulated
– Tariffed rate
– Prevailing price
– Lower of NBV or FMV
• There is a de minimus exception
AffiliatedTransactions
• Provision of services:
– Regulated to nonregulated affiliate
• Greater of fully distributed cost or FMV
– Nonregulated to regulated
• Lesser of fully distributed cost or FMV
– There is a de minimis exception
• Exception: Affiliate exists solely to provide
services to carriers corporate family
– Valued at fully distributed cost
Part32IncomeTaxAccounts
A/C #
A/C Description
4070
Income taxes accrued
4100
Net current deferred operating income tax
4110
Net current deferred nonoperating income tax
4320
Unamortized operating investment tax credits, net
4330
Unamortized nonoperating investment tax credits, net
4340
Net noncurrent deferred operating income taxes
4341
Net deferred tax liability adjustments
4350
Net noncurrent deferred nonoperating income taxes
4361
Deferred tax regulatory adjustments, net
Part 32IncomeTaxAccounts
A/C #
A/C Description
7210
Operating investment tax credits, net
7220
Operating federal income taxes
7230
Operating state & local income taxes
7250
Provision for deferred operating income taxes, net
7400
Nonoperating taxes
IncomeTaxes‐ TheBasics
• A/C 4070
– Provision for current year state & federal income tax
due to IRS or State
– Resulting from:
• Operating state & federal income tax
• Nonoperating state & federal income tax
• Nonregulated state & federal income tax
IncomeTaxes‐ TheBasics
• On the books:
–
–
–
–
Income before income tax
State income tax expense
Federal income tax expense
Net Income
300
(15)
(85)
200
• On the tax return:
–
–
–
–
Net income per books
Add federal income taxes
Pre-tax income
+/- book/tax differences:
200
85
285
• Permanent differences
• Timing differences
15
(150)
– Taxable income
150
IncomeTaxes‐ TheBasics
Taxable income
X Tax rates
Tax Due
(Estimated payments)
Payable to tax authorities
DeferredIncomeTaxes
• Tax normalization
– Required by Part 32
– Reflects the amount of income tax expense recorded
on the books as if there were no temporary
differences
DeferredIncomeTaxes
• What’s different for telephone companies?
– Rate base accounts:
• A/C 4100 - Net current deferred operating state &
federal income taxes
• A/C 4340 - Net noncurrent deferred operating tax
liability
– No rate base effect:
• A/C 4110 - Net current deferred nonoperating state &
federal income taxes
• A/C 4350 - Net noncurrent deferred nonoperating tax
liability
DeferredIncomeTaxes
• Deferred tax asset
– Results in lower taxes in future years
• Deferred tax liability
– Results in increased taxes in future years
SettlementIssues
• Operating Tax Expense
– Cost study calculations
Rate Base
(Fixed charges)
(SIT deducted for FIT)
Tax Base
@ 35% = Regulated Tax Expense
– USF calculations
• Includes amounts recorded in A/C 7220
OtherAccounts
• Income tax expense
– Accounts 7220, 7230, 7250, 7400
– Financial Statement Income Tax Expense is
composed of:
• Taxes currently Payable (total tax from return)
• +/- Change in Deferred Taxes
HotTopics– Part32Accounting
• Account coding is critical
– Inventory and expenses
• Segregate regulated from non-regulated
– Inventory, customer deposits, pension/post-retirement
benefits, and deferred tax liabilities
• Affiliate transactions
– Regulated will pay the least, nonregulated will pay the
most
• Consistent accounting between miscellaneous
and non-operating on both revenues, expenses,
and income tax accounts
DoesRateBaseStillMatter?
• With FCC changes in revenue and support
mechanisms, does rate base still impact
revenue?
• Yes – rate of return regulation is still a key
component of a regulated telephone company’s
revenue
Topic740(FAS109)Basics
Topic740(FAS109)Basics
• Accounting for Income Taxes
– Basic Principles:
• A current tax liability/asset for estimated taxes
payable/refundable for the current year
• A deferred tax liability/asset for estimated future effects
attributable to temporary differences and carryforwards
• Measurement of current and deferred liabilities/assets
are based on provisions of enacted tax law – future
changes are not anticipated
• Measurement of deferred tax assets is reduced, if
necessary, for amounts not expected to be realized
(valuation allowances)
Whyaretaxcalcsimportant?
• The tax accounts are usually considered
material to the financial statements
• Easily misunderstood
• Can be susceptible to error
– Dependent on other financial statement numbers
– Dependent on proper understanding of numerous
complicated tax law
– Dependent on comprehensive GAAP accounting rules for
income taxes
GAAPvs.Tax
• GAAP objective is to provide useful information
• Tax Code objective is to provide revenue to the
government
• A majority of the differences between GAAP and
the Tax Code are temporary
• Topic 740 (FAS 109) is a FASB requirement
(GAAP) but is calculated based upon the tax
code
Temporaryvs.Permanent
Differences
• Permanent Differences – deductions that will
never be allowed, and income that will never be
taxable
• Temporary Differences – result in Deferred Tax
Assets/Liabilities because they will reverse
TaxBalanceSheet
• SFAS No. 109 is a Balance Sheet Oriented
Statement
• A Result of Temporary Differences
• Example:
– Depreciation - $800 NBV for book purposes and $700
NBV for tax purposes
– Difference in basis multiplied by tax rate results in
deferred tax asset/liability
ComprehensiveCaseStudy
TaxProvision
Review of Case study template
Federal Income Taxes are nondeductible, so the
starting point of a tax provision is pre-tax income
State taxes are deductible but are recalculated as
part of the provision
CommonPermanent
Differences
PermanentDifferences
•
•
•
•
•
•
•
•
•
Penalties
Meals and entertainment
Life insurance premiums
Change in cash surrender value of life insurance
policies
Lobbying expenses
Tax exempt interest income
Political contributions
Nondeductible dues
Patronage Exclusion (for Cooperative entities)
CommonTemporary
Differences
TemporaryDifferences
•
•
•
•
•
•
Reserves
Accrued Vacation
Advance billings
Pension obligations
Post-retirement health obligations
Asset retirement obligations
Reserves
• Allowance for Doubtful accounts
• Inventory obsolescence
• Warranty reserves
AccruedVacation/Leave
• General Rule
– Not deductible until paid
• Exception
– Deduction allowed for vacation accrued as of year
end that has been paid out by 2.5 months after year
end
AdvanceBilling
• General rule taxable when received
• Exception for utility services– income taxable
when services are provided
– Utility services – includes telephone or other
communication services
• IRC Sec 451 (f)
PensionObligations&Post
RetirementHealth
• ASC Topic 715
• Can have significant liabilities accrued on the
books for these items
• For tax purposes, not deductible until funded
• May have previously been referred to as FAS
106 or FAS 87
PensionObligations&Post
RetirementHealth
• Topic 715 (FAS 158)
– Requires an actuarial calculation of the liability
– Upon initial implementation in 2007, the entry was to
record a CR to liability and DR to Other
Comprehensive Income
• Since this initial entry didn’t hit the income statement, no
income tax effect
– Unrecognized amounts in OCI are amortized to
expense in subsequent years
• Entry is to record a DR to expense and CR to OCI
• Income tax effect is to reverse expense until the liability is
actually paid out in cash
– Subsequent gains/losses in actuarial value can also
be running through OCI
AssetRetirementObligations
• May generate book/tax differences
• Book treatment:
– DR Plant, CR Asset Retirement Obligation Liability
– Plant asset is depreciated (CR A/D, DR Expense)
– Liability is accreted (CR liability, DR Expense)
• For tax purposes, depreciation expense and
accretion expense are not deductible until the
retirement obligation is actually paid
BTOPfunds
• May generate book/tax differences for
nonregulated companies
• Book treatment:
– Recorded as a deferred liability/deferred revenue
– Amortized into income over time
– Plant added at full cost
• For tax purposes, grant can potentially decrease
cost basis of asset resulting in lower
depreciation. Book income on deferred revenue
is not taxable.
PlantAccountingfromaTax
Perspective
TaxAccountingforPlant
• Plant in Service Schedule
– Additions
– AFUDC capitalized for books
– Contributions in Aid of Construction
• Accumulated Depreciation Schedule
–
–
–
–
Cost of Removal
Salvage – plant
Salvage – Inventory
Depreciation methods
• Tangible Property Regulations
AFUDC
Allowance for Funds Used During Construction
• Book treatment
DR Plant (CWIP)
CR Interest Expense
• Tax return
– Required to capitalize interest under different rules
(UNICAP)
CapitalizedInterest
• Tax return
– Required to capitalize interest under different rules
(UNICAP)
– Capitalization required for long-lived assets (greater
than 20 year life) and
– For all assets that have a construction period of 2
years or more OR
• Have a construction period of at least 1 year
and a cost of $1Million or more
CIAC
Contributions in Aid of Construction
•
Nonrefundable amounts paid to utilities
•
Purpose is to defray construction costs for
facilities that would not otherwise produce a
sufficient return
•
Book treatment
DR Cash
CR Plant
CIAC
• Tax treatment
– Taxable income when received
– Higher tax basis to depreciate
– Timing difference reverses as the asset is depreciated
IRCSection118andCIAC
• Contributions to capital
– Excluded from gross income if meets requirements in
Section 118
– Contributions in aid of construction don’t qualify under
Section 118
– Road moves can qualify
AdvancesinAidofConstruction
• Refundable – usually as additional customers
are added to the line, or a minimum quantity of
telephone services are purchased
• Book treatment
DR Cash
CR liability (deposit)
• Treated as liability and reduction of rate base
until final determination is made
AdvancesinAid
• Move to CIAC if advances will not be refunded
• Tax treatment
– Taxpayers’ position that advances are loans
– IRS’ position is that advances are CIAC
DepreciationDifferences
Book treatment
Cost of asset recovered ratably over economic life
of asset.
In practice achieved by combining costs for all
years into a given classification times a
composite rate
DepreciationDifferences
• Tax treatment
Cost recovered on an accelerated basis over an arbitrary
“recovery period” prescribed by law
MACRS:
• Telecom specific assets
• Wireless
• Mid-quarter convention
DepreciationMethodSelection
• Depreciation Method Selection
– MACRS – Accelerated depreciation method – 200% or 150%
depreciation over the appropriate lives, switching to S/L when it
results in a higher deduction - this is the tax default unless an
election is made to use another method
– S/L – Straight line depreciation election – this election allows for
utilization of the book method of depreciation so that tracking of
book-tax differences is not required
• May make sense if there are large net operating loss
carryforwards, if the entity doesn’t pay tax due to cooperative
structure, etc.
– Others – ADS, Units of production, etc.
DepreciationConvention
• Depreciation Convention
– Under MACRS there are two depreciation conventions:
• Half Year (HY) – Every asset is considered to be added and
disposed at the mid-point of the year, so in the first and last
year ½ of the yearly depreciation is allowed.
• Mid-Quarter (MQ) – Depreciation is calculated based upon
which quarter the asset was placed in service
– Other conventions – Mid-month, Full-month, etc.
Mid‐quarterConvention
• If more than 40% of additions in last quarter,
mid-quarter convention applies
• Common problem for utilities
– Large work orders left open until the end of the year
– Weather often causes projects to be completed in the
fall & closed in the last quarter
NewTangiblePropertyRegulations
• What can be capitalized vs. expensed?
–
–
–
–
Materials & Supplies
Acquisition costs
Improvements to existing assets
Retirements
ScopeofNewTemporary
Regulations
Acquisitionof
tangible
property
Improvement
oftangible
property
Dispositionof
tangible
property
• Material&
supply
• Capitalized
acquisitioncosts
• Deminimisrule
• Unitof
property
• Repairvs.
improvement
• Routine
maintenance
• Structural
components
• Generalasset
accounts
64
Rev.Procs.2012‐19and2012‐20
• 19 automatic changes added to Rev. Proc. 2011-14
based on temporary regulations
– -19 applies to §§162,263(a)changes
– ‐20appliesto§§167, 168 changes
• All scope limitations waived for first two years
• Effective for tax years beginning on or after January 1,
2012
• Mix of §481(a)and“modifiedcut‐off”
• 3115scan/shouldbecombined
• ManynecessitatepropercapitalizationforUNICAP
65
MaterialsandSupplies:Overview
IstheItema
Materialand
Supply?
WhatKindof
Materialand
Supplyisit?
Evaluate
Optionsfor
CostRecovery
andMake
Appropriate
Elections
66
WhatareMaterialsandSupplies?
Tangible property used or consumed in the taxpayer’s
business that is not inventory and that is:
1) A component acquired to maintain, repair, or improve a
unit of tangible property that is not acquired as part of
any single unit of property;
2) Fuel, lubricants, water, and similar items that are
reasonably expected to be consumed within 12 months
after use begins;
3) A unit of property that has an economic life of 12
months or less after use begins; or
–
Useful life on AFS or from facts and circumstances
4) A unit of property that has an acquisition cost of $100 or
less.
67
AcquisitionofTangibleProperty:
Overview
• General
– Taxpayer must capitalize amounts paid to acquire or
produce a unit of real or personal property.
• Costs required to be capitalized:
1) Invoice price
2) Facilitative transaction costs
–
–
Amts paid to pursue or investigate transaction
11 “inherently facilitative” costs
3) Work performed prior to placing property in service
4) Defending or perfecting title to real or personal property
68
RepairExpensevs.Capital
Improvements:Overview
Identifythe
Unitof
Property
(UoP)to
Measurethe
Possible
Improvement
BARTest:
• Betterment
• Adaptation
• Restoration
ApplyRoutine
Maintenance
SafeHarboror
DeMinimis
Rule,if
Applicable
69
WhatistheUnitofProperty?
Buildings
• Building & structural components are the UoP
• Improvement standards applied at building structure or building system level
Plant Property
• Functionally interdependent machinery used to perform an industrial process
• Separate UoP for equipment performing “discrete and major function”
Network Assets
• Based on facts and circumstances
• Separate guidance
Leased Property
• UoP cannot exceed leased portion (lessee)
• Building and building systems subject to lease
Other Property
• Functional interdependence test
70
UnitofPropertyforImprovement
Standards:Buildings
Building structure
• Consists of the building
and its structural
components other than
building systems.
• This includes: walls,
floors, partitions, ceilings,
windows, doors, etc.
Building systems
1.
2.
3.
4.
5.
6.
HVAC system
Plumbing system
Electrical system
All escalators
All elevators
Fire protection and alarm
systems
7. Security systems
8. Gas distribution systems
9. Other structural
components identified in
guidance
71
ThreeImprovementTests(BAR
Test)
Adaptation Betterment
Restoration
Capital Improvement
72
GroupDepreciationand
MassAssetElections
• Telephone companies are allowed to use group
depreciation calculations for book (regulatory
purposes)
• For tax purposes the same rules apply
– One asset can be depreciated for each group
Single Asset Account (SAA)
Multiple Asset Account (MAA)
Used for
>1 Asset Single Asset OR One Asset
(w/ same depreciation factors)
>1 Asset (w/ same depreciation factors)
Dispositions
AccountingforMACRSProperty
Stop depreciating and recognize G/L using adjusted basis
Stop depreciating and recognize G/L using adj. basis on portion disposed; adj. remaining basis
Continue depreciating asset; ordinary income on proceeds – no loss recognized (unless elect out)
General Rule (Default)
General Asset Account (GAA)
If Elected
74
CostofRemoval
• Definition – Costs incurred to remove an asset from
service
• If accruing for cost of removal on the books, this results
in a temporary difference.
• For tax purposes amounts are deductible when incurred
or realized.
• Book entry upon disposal
DR A/D
CR cash
CashSalvage
• Proceeds realized on disposal of plant
• Book entry
DR Cash
CR A/D
• Tax treatment – salvage proceeds should be
included in the disposal calculation as a
component of the gain/loss
SalvageTransferredtoInventory
• Plant removed from service can be transferred
to inventory
• Book entry
DR Inventory (FMV)
CR A/D
• For tax purposes no gain or loss recognized –
different book/tax basis for inventory
LikeKindExchanges
• Most common on vehicles that are traded in for
newer vehicles
• Book treatment of sale – generally recognized
as disposal and Cash Salvage
• Tax Purposes
– No gain or loss is recognized on the trade-in
– Cost basis of the new asset is reduced by deferred
gain on old asset
NonoperatingItems
Nonoperating/Nonregulated
DeferredTaxItems
• Goodwill
– Not amortizable for Books, but amortizable for tax
purposes
• Nonregulated depreciation differences
• Partnerships/Pass-through investment basis
differences
– A variety of methods may be used for book
purposes (equity method, cost method, etc.)
– Tax purposes – original cost plus Schedule K-1
income/loss items
CaseStudy
Complete the reconciliations related to
Operating/Nonoperating Deferred
Assets/Liabilities
Review the current calculation of nonoperating
and nonregulated tax expense
FINISHED WITH CASE STUDY!!
COMMERCIAL TELEPHONE
Reconciliation of income tax accounts
Cash
Federal
liability
A/C 1120
A/C 4070
Monthly estimate accruals
20xx estimated payments:
Pay 1Q estimate
Pay 2Q estimate
Pay 3Q estimate
Pay 4Q estimate
Balance pre-audit
(100,000)
(25,000)
(25,000)
(25,000)
(25,000)
25,000
25,000
25,000
25,000
(100,000)
0
Audit adjustments:
Reverse estimate accruals
Record federal income tax
Allocate nonoperating/nonregulated
Balance per audit
100,000
(120,190)
(100,000)
(20,190)
Operating Nonoperating
federal
federal
Nonregulated
A/C 7220 A/C 7400.1
A/C 7990
50,000
40,000
10,000
50,000
40,000
10,000
(50,000)
120,190
(36,210)
(40,000)
(10,000)
31,110
5,100
83,980
31,110
5,100
Total tax expense
120,190
Topic740–
AdditionalTopics
Topic740– othertopics
•
•
•
•
•
•
State Income Taxes
Net Operating Losses
Valuation Allowances
Change in Valuation Allowances
Change in Tax Status
Financial Statement Presentation/Disclosures
StateIncomeTaxConsiderations
• Consider Apportionment Among States for MultiState Taxpayers
• Franchise Tax/Income Tax
– Some state taxes based upon items other than
income
• Many Companies use a Blended Rate to
Calculate Deferred State Income Taxes
StateIncomeTaxConsiderations
• State versus Federal Net Operating Losses
– Different Carryforward Periods (5 yr for federal)
– Consider Deferred Rates
• Depreciation Differences for State Purposes
• Other Additions/Subtractions for State
– State income tax expense
– Tax Exempt Interest
• State Credits
NetOperatingLosses
• If the Corporation Generates a Net Operating
Loss it is treated as a Deferred Asset/Liability
• NOL’s are available to be carried back 2 years
and forward 20 years (Federal)
– Election to carryback 5 years or 4 prior tax years for
federal
– States may or may not conform
NetOperatingLosses
• Allocation between members of a consolidated
group:
– Be consistent in application
– Group should document tax sharing agreements
– Example Situation: Sub 1, 2, and 3 have taxable
losses, Sub 4 has taxable income, consolidated there
is taxable losses – how to allocate current losses to
each subsidiary?
ValuationAllowances
• Deferred Tax Assets must be reduced by a
valuation allowance if the benefits of the asset
are not expected to be realized.
• Deals with “realizability” of the assets rather than
existence
• “More-likely-than-not” standard for recognizing a
valuation allowance
ValuationAllowances
• Evaluating the need for an allowance
– Review sources of taxable income:
• Future reversals of existing temporary differences
• Taxable income in prior carryback years, if carryback is
permitted under the tax law
• Tax planning strategies
• Future taxable income
– Evaluate positive and negative evidence
• History of unused NOL’s
• Losses expected in early future years
• Carryback or carryforward periods
ChangeinaValuationAllowance
• General rule – adjust the valuation allowance
and expense
• Exceptions:
– Valuation allowance initially recognized in a purchase
business combination
– Certain transactions that are recognized in equity
ChangeinTaxStatus
• Example – Change from tax-exempt entity to a
taxable entity or from taxable to a flow-through entity
– Tax Exempt Cooperative to a Taxable Cooperative
– Nonprofit or S corporation to a C corporation
– C corporation to an S corporation or LLC
• Effect is recorded at the date the change occurs
– Record or remove deferred tax assets/liabilities
– S Corporations – Built-in-gains tax is a deferred tax liability
and must be retained on the books
FinancialStatement
Presentation/Disclosures
• Components of Tax Expense
• Deferred Asset/Liability Components
• Rate Reconciliation
FinancialStatement
Presentation/Disclosures
• Significant components of income tax expense
must be disclosed:
–
–
–
–
–
–
–
Current tax expense/benefit
Deferred tax expense/benefit
Investment tax credits
Government grants
Benefits of operating loss carryforwards
Allocation of tax benefits to capital/goodwill
Change to deferred asset/liability due to changes in
tax law or rates
– Change in Valuation allowance
FinancialStatement
Presentation/Disclosures
• Deferred Asset/Liability Components:
– Current and noncurrent deferred income taxes are
reported separately
• Determination of current and noncurrent is based upon the
life of the underlying asset giving rise to the temporary
difference
• Current deferred assets can be netted with current deferred
liabilities and noncurrent can be netted only if related to a
particular jurisdiction
FinancialStatement
Presentation/Disclosures
• Rate Reconciliation:
– Public – Rate reconciliation
– Nonpublic – explanation of reconciling items
• Other
– Total valuation allowance
– Public – approximate tax effect of each type of temporary
difference and carryforward
– Nonpublic – disclose the types of significant temporary
difference and carryforwards (don’t have to disclose the
tax effect)
– Amounts and expiration dates for all NOL’s and credit
carryforwards
FinancialStatement
Presentation/Disclosures
• SAMPLE FOOTNOTE
OtherTaxConsiderations
OtherTaxConsiderations
• Tax Rates
• Tax Credits
• Section 199 Deduction
• S Corporation Election
• Alternative Minimum Taxes
RegularIncomeTaxRates
(CCorporations)
• Tax rates are tiered based upon net taxable income
– 15% for first 50,000
– 25% for next 25,000
– 34% for next 25,000
– 39% for 100,000-335,000
– 34% up to 10 million
– 35% for 10-15 million
– 38% for 15-18.333 million
– 35% above
TaxCredits
• Dividends received deduction
• Alternative minimum tax credit
• R&D credit
• Renewable electricity credit – Wind,
Hydropower, etc.
• General Business Credits
• Some will expire at the end of 2012
Section199Deduction
(ElectricityProducers)
• Domestic Production Activities Deduction
– Eligible for Producers
– Various calculation methods
– NOT eligible for Transmission or Distribution income
only for Production income
– Calculated as 3% (for 2006) or 6% (2007-2009) and
9% thereafter, of the lesser of QPAI or net taxable
income, limited to W-2 wages
SCorporationElection
• Requirements
–
–
–
–
Must be a domestic corporation
Must not be an ineligible corporation
Must have less than 100 shareholders
All shareholders must be individuals, decedents’
estates, bankruptcy estates, some trusts, or a tax
exempt 501(c)(3) (some others may qualify)
– No shareholder may be a nonresident alien
– Must have only one class of stock
SCorporations
• Benefits of an S Corporation
– No double taxation
– Net income flows through to the shareholders and is
reported on their individual returns
– Sale of stock generally results in a lower taxable gain
AlternativeMinimumTax
• Separate tax calculation required
• Was designed to prevent taking advantage of the regular
tax system
• NOL carryovers limited to 90% of taxable income
• Depreciation methods and lives differ for AMT purposes
• 20% tax rate
• Allowed a credit for any AMT that is paid that carries to
future years
TelecomAcquisitions
• Telephone Plant purchases from another telephone
company
– Regulated telephone companies record the purchase of
another companies’ plant as follows:
• DR Plant (at original cost per prior companies’ records)
• CR Accumulated Depreciation (at amount depreciated
through the purchase date)
• CR Cash (for the purchase of the plant and/or company)
• DR/CR – Goodwill/Acquisition Adjustment
– Goodwill versus Acquisition Adjustment
• Acquisition Adjustment is determined by PUC, is part of
rate base, and amortizable on the books
• Goodwill is the remainder, not part of rate base, not
amortizable
TelecomAcquisitions
• For tax purposes the cost of the assets are depreciable over the
useful lives as defined by the Internal Revenue Code (IRC)
• Acquisition adjustment and Goodwill are both amortizable for tax
purposes
• How to treat a purchase of plant from another telephone company
for tax purposes:
– Practical TIP - Set up two assets
• One asset that is fully depreciated equal to the A/D on that
asset
• A second asset that is equal to the NBV of the asset
purchased
• This results in having a tax depreciation schedule that ties
out to the books for cost, but treats the purchase correctly for
tax purposes in that you depreciate the amount you paid for
GoodwillandPurchaseAccounting
• Goodwill and Purchase Accounting
– If purchasing the stock of a company this company
will then become a subsidiary of the purchasing
company
• In this case the goodwill on the books of the company will not
be depreciable (for tax purposes)
– If purchasing the assets of a company the amount
that exceeds the NBV of the assets that you
purchased is considered goodwill (or acquisition
adjustment, as discussed previously)
• This goodwill is depreciable for tax purposes
FIN48–
AccountingforUncertainty
inTaxPositions
FIN48– AccountingforUncertainty
inTaxPositions
• This Interpretation shall be effective for fiscal years beginning
after December 15, 2006. (Delayed for non-public entities for tax
years beginning after December 15, 2008)
• The provisions of this Interpretation shall be applied to all income
tax positions upon initial adoption of this Interpretation.
• Only tax positions that meet the more-likely-than-not recognition
threshold at the effective date may be recognized or continue to
be recognized upon adoption of this Interpretation.
• The cumulative effect of applying the provisions of this
Interpretation shall be reported as an adjustment to the opening
balance of retained earnings for that fiscal year, presented
separately.
• The cumulative-effect adjustment does not include items that
would not be recognized in earnings, such as the effect of
adopting this Interpretation on tax positions related to business
combinations.
FIN48Background
•
This Interpretation requires the affirmative evaluation
that it is more likely than not, based on the technical
merits of a tax position, that an enterprise is entitled to
economic benefits resulting from positions taken in
income tax returns.
•
If a tax position does not meet the more-likely-than-not
recognition threshold, the benefit of that position is not
recognized in the financial statements.
FIN48Objectives
•
Standardize the accounting for uncertain tax
positions
•
Enhance relevance and comparability of
financial statement reporting
•
More transparency desired by SEC
FIN48Scope
•
Applies to all income tax positions, including
federal, state/local, and foreign
– FAS 5 will continue to apply to other tax positions,
i.e. – sales tax or property tax
•
Applies to all U.S. GAAP reporters, public,
private, and non-profit
•
Applies to income tax positions recorded in a
business combination
FIN48UncertainTaxPositions
•
It can result in a permanent reduction of income taxes
payable, a deferral of income taxes otherwise currently
payable to future years, or a change in the expected
realizability of deferred tax assets.
•
Tax position also encompasses, but is not limited to:
–
–
–
–
A decision not to file a tax return
An allocation or a shift of income between jurisdictions
The characterization of income or a decision to exclude
reporting taxable income in a tax return
A decision to classify a transaction, entity, or other
position in a tax return as tax exempt.
FIN48UncertainTaxPositions
•
This Interpretation provides guidance on derecognition,
classification, interest and penalties, accounting in
interim periods, and disclosure.
•
An enterprise shall initially recognize the financial
statement effects of a tax position when it is morelikely-than-not, based on the technical merits, that the
position will be sustained upon examination. The term
“more likely than not” means a likelihood of more than
50 percent.
FIN48
Recognition/Measurement
•
The evaluation of a tax position in accordance with this
Interpretation is a two-step process. The first step is
recognition:
–
The enterprise determines whether the tax position will
be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the
technical merits of the position.
–
In evaluating whether a tax position has met this
recognition threshold, the enterprise should presume
that the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant
information.
FIN48
Recognition/Measurement
– The second step is measurement:
A tax position that meets the recognition threshold is
measured to determine the amount of benefit to
recognize in the financial statements. The tax
position is measured at the largest amount of
benefit that is greater than 50 percent likely of being
realized upon ultimate settlement.
CaseStudy– QuickCalc
• Let’s complete this together
Closingcomments
• Topic 740 is complex
• It is difficult to stay up to speed with tax law
changes & GAAP changes
• Client & accounting firm should work closely
together to proactively review these calculations
WrapUp
• Evaluations
• CPE Certificates
THANK YOU