Financial Statement Implications for CFOs

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The Inflation Reduction Act of 2022 (the “Act”) (HR 5376), signed into law by President Biden on August 16, 2022, contains various key tax provisions that can affect the financial statements of a public or private company . Below, we discuss some of the changes in tax law that may potentially impact financial statement accounting and also provide preliminary opinions that are subject to change as we expect there to be changes. other discussions and debates within the accountancy profession.

Please see our previous Tax Alerts which describe these two provisions in more detail.

Book Minimum Tax (“BMT”)

The new corporate minimum tax will work much like the pre-2018 Alternative Corporate Minimum Tax (“AMT”), requiring corporations to calculate taxes first on taxable income and then again on income. accountant based on the adjusted financial statements, and to pay the greater of the two. Thus, the BMT will only increase a taxpayer’s tax to the extent that the provisional minimum tax exceeds the ordinary tax plus any base erosion and anti-abuse tax (BEAT). In turn, any AMT paid will generate a carryover credit, which can be applied to reduce regular tax in any future year to the amount of provisional minimum tax calculated for that year. The BMT is effective for tax years beginning after December 31, 2022.

Although we continue to analyze the impact of BMT on the financial statements, we currently expect it to be accounted for as the company AMT scheme that existed prior to the Tax Cuts and Jobs Act 2017. impact on the effective tax rate, as a deferred tax asset could be established for the indefinite life AMT credit carryforward that would be created when subject to AMT. This deferred tax asset has however been subject to a provision for loss. The new BMT also creates an AMT credit that similarly can be carried forward indefinitely to reduce regular future tax.

ASC 740 also provides that “the applicable tax rate for measuring US federal deferred taxes is the ordinary tax rate”. Therefore, companies will not have to reassess deferred taxes during the quarterly period of application.

Excise tax on share redemptions

Effective for share buybacks made on or after January 1, 2023, the law will impose a 1% excise tax on such “buybacks” of shares of a “covered company” in the year of taxation (“share redemption excise tax”).

Two certainties are that this excise tax will not be deductible for federal tax purposes and it will not be considered a tax under ASC 740. ASC 740 states that “a tax on the income is based on income, expenses, gains or losses that are included in his taxable income. The excise tax on the redemption of shares is not based on a measure of income and therefore falls outside the scope of ASC 740.

US GAAP, however, does not address the accounting treatment of taxes paid in connection with share repurchases. The question is whether the excise tax will be recognized as an expense recognized in pre-tax income or as an adjustment to the cost of repurchased shares recognized as an adjustment to equity. Further discussion on how to account for this tax is awaited.

CFOs and others responsible for tax impacts on the financial statements should continue to monitor these provisions for expected guidance from the IRS and Treasury and should consult with their accounting advisors on the appropriate accounting treatment.

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