When the Tax Cuts and Jobs Act (TCJA) was passed, the Securities and Exchange Commission (SEC) issued interpretive guidance permitting public companies to use “good faith estimates” to adjust for its income tax effects. Following its lead, the Financial Accounting Standards Board (FASB) allowed private companies to do the same.
But now time is up: that grace period expires at the end of December. Starting in January, companies must be ready to comply with the income tax reporting requirements in U.S. generally accepted accounting principles (GAAP). If you haven’t yet invested adequate time and resources to understand how the TCJA will affect your company (public or private), you could be caught unprepared.
What does that mean for tax reporting?
GAAP requires companies to adjust deferred tax assets and liabilities to account for changes in tax laws or rates. For income statements, the adjustment is included in income from continuing operations. The guidance applies even when deferred tax liabilities and assets are related to items presented in other comprehensive income, such as pension adjustments, gains or losses on cash flow hedges, and foreign currency translation adjustments.
Few tax law changes have been as sweeping as those in the TCJA, which is considered the biggest change to the tax code in 30 years. That makes its effects difficult to estimate, especially for companies with global operations and those with significant deferred tax assets and liabilities on their balance sheets. Because of the scope and the speed with which the TCJA was signed into law, few companies were able to follow the customary GAAP practice of reporting the effects of tax law changes at the time those changes are enacted.
Grace period guidance
On the same day the TCJA was enacted, the SEC issued Staff Accounting Bulletin (SAB) No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. This guidance has allowed companies to use “reasonable estimates” and “provisional amounts” for some tax-related line items in their fourth-quarter and year-end 2017 financial statements.
Even though SABs apply directly to only public companies, in early 2018 a FASB Staff Q&A, Whether Private Companies and Not-for-Profit Entities Can Apply SAB 118, clarified that a private company or a not-for-profit entity voluntarily applying SAB No. 118 would be deemed in compliance with GAAP, provided that 1) all relevant aspects of SAB No. 118 are applied in their entirety, including the required disclosures, and 2) a statement that SAB No. 118 has been applied is disclosed as an accounting policy.
These two guidance publications offered both public and private businesses a little extra time to digest the tax law changes that would affect them under the TCJA.
Is your company ready?
The grace period ends on the first anniversary of the TCJA: December 22, 2018. In September, SEC Deputy Chief Accountant Sagar Teotia announced that the SEC isn’t planning to extend the deferral past that date. He explained that, as the IRS has issued additional guidance on specific TCJA provisions, public companies have generally supplied more detail in their financial reports.
However, Teotia — as an SEC leader — isn’t focused on private businesses or nonprofits with limited financial resources and expertise. These smaller entities may not fully understand the effects of the TCJA and, therefore, may need additional help complying with the accounting rules for income taxes in the coming months.
If your company is still unsure how the TCJA will affect its financial statements, Weaver can help. Contact us for more information about how to meet these new requirements.