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Summary of State Tax Financial Disclosure Opportunities

Many companies created large reserves for uncertain state income tax return positions under ASC 740-10, Uncertain Income Tax Positions (formerly FIN 48). Other reserves were created for uncertain non-income tax positions under ASC 450, Contingencies (formerly FAS 5). In most cases, these reserves have increased over time, especially those relating to non-filing positions and nexus.

What many companies fail to realize is that changes in business operations, state law or state administrative procedures can result in allowable decreases to those reserves, resulting in substantial increases to reported financial income.

We can determine whether a revised state tax position meets the applicable standards with respect to the various state tax jurisdictions and, when appropriate, we can provide a state tax opinion that can be used to help demonstrate that the threshold has been met for adjusting reserves.

About State Tax Financial Disclosures

Initially, the the Accounting Principles Board (APB) issued guidance in the form of Opinion No. 11, Accounting for Income Taxes (1967). Subsequently, the Financial Accounting Accounting Standards Board (FASB) issued guidance in FASB Statement No. 96, Accounting for Income Taxes (1987), which was superseded by FASB Statement No. 109, Accounting for Income Taxes (1992) and Interpretation No. 48, Accounting for Uncertainty in Income Taxes (2006).

In 2007, entities began implementing FIN 48 by creating reserves for uncertain income tax positions. In many cases, large reserves were created for uncertain state income tax return positions.

Within a couple of years, all of those standards were superseded by FASB Accounting Standards Codification (ASC) 740, Income Taxes (2009).

Application of the ASC 740-10 uncertain tax position standard is a two-step process. Step One is determining whether a "recognition threshold" is met. The threshold is met when it is "more likely than not" that the taxpayer will prevail in a dispute with taxing authorities. Step Two is measuring the proper amount to be recognized. The tax position is measured at the largest amount that is more than 50 percent likely to be realized upon ultimate settlement.

In most cases, the reserves established under FIN 48 increased over time, especially those relating to non-filing positions and nexus. What many companies fail to realize is that a change in facts, state law or state administrative procedures can result in support for an entity's more conservative state tax position meeting the "more likely than not" standard, requiring a subsequent decrease to those reserves under the "change in measurement" or "derecognition" provisions of ASC 740-10-35 and 40.

How We Can Help with State Tax Financial Disclosures

Assistance with state tax financial disclosures is designed to help clients properly apply GAAP when reporting complex and uncertain state tax positions. These tax positions can include those taken on previously filed tax returns or positions expected to be taken in a future tax return when these tax positions result in changes to income taxes payable, deferred income taxes or deferred tax assets (including tax elections and tax-planning strategies). State tax positions also include the following common situations:

  • Not filing a return in a particular state (due to perceived lack of nexus)
  • Changing filing methodologies (i.e. separate v. combined v. consolidated reporting)
  • Shifting income between states (through management fees, IP licensing, transfer pricing, apportionment planning, etc.)
  • Characterizing or excluding income as non-taxable
  • Classifying transactions, entities, etc. as tax exempt
  • Changing an entity's status (including LLC treatment as pass-through or corporation and S-Corporation to/from C-Corporation)

We can determine whether a revised state tax position meets the "more likely than not" standard with respect to the various state tax jurisdictions and, when appropriate, we can provide a state tax opinion (in accordance with ASC 740, paragraphs 740-10-25-6, 7 and 13) that can be used to help demonstrate that the more-likely-than-not recognition threshold has been met.

Our state tax opinions, like all of our State Tax Research Services, involve careful and complete research that complies with the AICPA's Statements on Standards for Tax Services (SSTSs), which are enforceable tax practice standards for members of the AICPA.

We can also assist with tax positions relating to non-income taxes (including sales and use, gross receipts, franchise taxes based upon capital, unclaimed property, etc.) which are covered under FASB guidance issued in ASC 450, Contingencies (formerly FAS 5) and which are subject to different reporting thresholds and standards.

IMPORTANT NOTE: In the near future, ASC 740 may be converged with IAS 12, the International Accounting Standard that deals with Income Taxes. Proposed guidance on accounting for uncertain tax positions may require measurement by a probability-weighted average amount of all possible outcomes, rather than the Step Two standard mentioned above.

Whether the FASB revises ASC 740 or the SEC mandates adoption of IAS 12, significant changes are coming to the manner in which U.S. companies account for uncertain state tax positions. In some cases, the impact on financial income can be large. We are monitoring sources within the SEC, FASB and IFRS Foundation to stay abreast of the latest developments.

ADDITIONAL IMPORTANT NOTE: Beginning with the 2010 tax year, certain corporate taxpayers with assets of $100+ million were required to file Schedule UTP, Uncertain Tax Position Statement, with the Internal Revenue Service. This IRS Schedule captures information reported by businesses to their financial auditors in establishing reserves for uncertain tax positions under ASC 740 (formerly FIN 48). Note that the asset threshold for filing IRS Schedule UTP decreased to $50 million for the 2012 and 2013 tax years. In 2014, the threshold drops to $10 million.

Although the IRS indicates that Schedule UTP requires the reporting of federal income tax positions, and not state income tax positions, state tax administrators are able to request and receive Schedule UTP information for taxpayers in their states. California began requiring submission of IRS Schedule UTP to the Franchise Tax Board beginning in 2010. In addition, some state tax administrators have stated that they may require state-specific UTP forms and information for income taxes (and possibly other state taxes) in the future. We will continue to monitor the IRS, state tax departments, the MTC (Multistate Tax Commission) and other sources for the latest developments.

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