Deferred Taxes & The Tax Cuts and Jobs Act

written by Ray Moncrieffe

The Tax Cuts and Job Act, enacted on December 22, 2017, brought about some major changes in the tax code. These changes are generally positive for businesses. One of the highlights, and welcome changes, lowered the corporate tax rate to 21%, effective for tax years beginning after December 31, 2017.

While paying less income taxes are always ideal, this also presents some challenges when accounting for income taxes under ACS 740, Income Taxes (ASC 740). ASC 740 requires that deferred tax assets and deferred tax liabilities be adjusted upon enactment of new laws and the effect of these changes reported in net income in the year of enactment. This may result in a material adjustment to your 2017 net income, which can be either positive or negative.

These changes also impact the deferred taxes on items reported in Accumulated Other Comprehensive Income (AOCI) such as, unrealized gains or losses on securities, and creates another level of complication. Although there has been no impact to the income statement for the initial recording of the deferred taxes and the change in AOCI items, any change in the tax rate must be recorded through the 2017 current income tax expense account.

This will also leave a reconciling item in the unrealized gain/loss capital account that will remain until the securities that are held on the date the change in tax rate occurs are sold or mature. Because of these changes, and the potential material impact on the company’s financial statements, we recognize that the accounting required to quantify and report the effect of these changes can be cumbersome and time consuming. Furthermore, these changes are required to be reported in your 2017 financial statements, therefore, it is imperative that each company quantify the impact.

We understand the impact of these changes and are equipped to assist you with these calculations and the required adjustments. Please contact us if you have any questions: https://whitlockco.com/contact/