The AJCA's FAS No. 109 implications.
FSP FAS 109-1
The AJCA's qualified production activities deduction (Sec. 199) is the lesser of 3% (increasing to 9% in 2010) of either a taxpayer's "qualified production activities" income or taxable income, determined without regard to this deduction. Importantly, however, no deduction is available if a taxpayer has a net operating loss (NOL) for the current tax year, or NOL carryovers that eliminate taxable income for the current year.
Companies had to consider the AJCA's changes to accounting for income taxes and apply FSP FAS 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, to the first quarter of 2005. According to FSP FAS 109-1, after the AJCA, companies should account for the tax deduction on qualified production activities as a special deduction--a permanent difference--rather than as a rate reduction. Companies may have to consider the deduction's effect on their effective tax rate in determining the estimated annual rate used for interim financial reporting.
Any benefit from the deduction has to be reported during the year in which the deduction is claimed. Separate disclosure in the effective tax rate reconciliation may be warranted. Due to the need for interpretation, some companies may have to record an accrual for a potential disallowance of the deduction. Further, state guidance on deductibility for state business taxes is still unavailable in many jurisdictions.
FSP FAS 109-2
The AJCA provides a special onetime, 85% tax deduction of certain foreign earnings repatriated to a U.S. taxpayer under Sec. 965, provided certain criteria are met, including:
* Investing dividends in the U.S. under a domestic reinvestment plan (Sec. 965(b)(4)(B)).
* Obtaining an approval of the reinvestment plan by the chief executive officer (or official of equal standing) or the board of directors, within the required period (Sec. 965(b)(4)(A)).
* Using the funds for certain qualifying activities (Sec. 965 (b) (4)(B)).
* Specifying the activities' nature in the plan.
FAS 109 requires recognition of a deferred tax liability for the excess of the book basis over the tax basis of investments in foreign subsidiaries or joint ventures. However, an exception for the excess attributable to undistributed earnings is provided in Accounting Principles Board Opinion No. 23, Accounting for Income Taxes--Special Areas, if the parent affirmatively asserts that the earnings are indefinitely reinvested outside its home tax jurisdiction.
FAS 109 Paragraph 27 typically requires adjustments to deferred tax liabilities and assets for the effects of a change in tax laws or rates in the period that includes the enactment date. Because of FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, companies, in applying FAS 109, now have more time to evaluate the AJCA's effect on their plans for reinvestment or repatriation of certain foreign earnings. Without this extension, they would have been required to examine their plans for reinvestment or repatriation and apply FAS 109 in the enactment period.
Although FSP FAS 109-2 extends time, it does not relieve companies of having to record an appropriate deferred tax liability when they decide to repatriate earnings. In some situations, they may have to use their judgment to determine when to repatriate earnings. Companies should not delay accruing a tax liability until they declare or pay dividends. However, under FSP FAS 109-2, certain disclosure requirements apply until a company decides whether to repatriate earnings. Management will need to evaluate compliance with the AJCA provisions to ensure that repatriated earnings qualify for the beneficial tax treatment.
Public companies subject to reporting under the Sarbanes-Oxley Act of 2002 (SOA) will want to evaluate their controls in place to reasonably assure timely and accurate reporting of any changes in income taxes that may have resulted from changes in reinvestment or repatriation plans.
In the new world of the SOA, advisers interpreting complex tax law changes must now assume even greater responsibility for accounting for income taxes under FAS 109. This statement has not been revised, except for the two FSPs, since it was issued in February 1992. Thus, tax advisers now find themselves not only interpreting complex tax guidance, but also interpreting complex accounting literature. Although the SOA has drawn the line between providing independent audit services and providing tax consulting services to public companies, the two service groups--auditors and tax advisers--appear to need each other's expertise more than ever.
FROM KATHERINE D. MORRIS, CPA, ATLANTA, GA
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|Title Annotation:||American Jobs Creation Act of 2004, financial accounting statement|
|Author:||Morris, Katherine D.|
|Publication:||The Tax Adviser|
|Date:||May 1, 2005|
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