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The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains several tax-related provisions for businesses affected by the current pandemic. Those provisions will also impact financial statements.
Companies issuing financial statements under GAAP are required to follow ASC Topic 740, Income Taxes. This complicated guidance requires companies to report the effects of new tax laws in the period they are enacted. As a result, companies — especially those issuing quarterly financial statements or that have fiscal year ends in the coming months — are scrambling to interpret the tax relief measures under the new law.
What are the tax law changes?
The CARES Act suspends several revenue-generating provisions of the Tax Cuts and Jobs Act (TCJA). These changes aim to help improve operating cash flow for businesses during the COVID-19 crisis. Specifically, the new law temporarily scales back TCJA deduction limitations on:
- Net operating losses (NOL),
- Business tax losses sustained by individuals,
- Business interest expense, and
- Charitable contributions for corporations.
The CARES Act also accelerates the recovery of credits for prior-year corporate alternative minimum tax (AMT) liability. And it fixes a TCJA drafting error for real estate qualified improvement property (QIP). The fix retroactively allows a 15-year depreciation period for QIP, making it eligible for first-year bonus depreciation in tax years after the TCJA took effect. The correction will enable businesses to choose between first-year bonus depreciation for QIP expenditures and 15-year depreciation.
These changes are subject to numerous rules and restrictions. So, it’s not always clear whether a business will benefit from a particular move. In some cases, companies may need to file amended federal income tax returns to take advantage of retroactive changes in the law. Also, a company’s tax obligations may be impacted by relief measures provided in the states and countries where it operates.
What is the impact on financial reporting?
Under ASC 740, companies must adjust deferred tax assets and liabilities for the effect of a change in tax laws or tax rates. On the income statement side, the adjustment is included in income from continuing operations.
If your business follows U.S. GAAP, you’ll need to account for the effect of the CARES Act on deferred tax assets and liabilities for interim and annual reporting periods that include March 27, 2020 (the date President Trump signed the law). Also, specific provisions, such as the modified NOL and business interest deduction rules, may impact a company’s current taxes payable. Unfortunately, some companies may have difficulty accurately forecasting income or loss in the current period due to the economic disruptions caused by COVID-19.
In the coming months, the Financial Accounting Standards Board (FASB) plans to focus on supporting businesses as they navigate the impact of the COVID-19 crisis and to clarify financial reporting issues as they arise.
We are atop the latest developments and can help guide you through your tax and financial reporting challenges. For additional information, call us at 818-334-8646 or click here to contact us.