Income tax provision considerations for financial statement preparers

Feb 07, 2023
Audit Financial reporting Income taxes

Financial statement preparers should consider the impact of new tax laws and regulations on income tax calculations and disclosures in their 2022 financial statements. While the list below is not intended to be comprehensive, it provides a high-level summary of new laws that affect the 2022 tax year and may impact 2022 financial statements. For further information please consult RSM’s tax alert and RSM ASC 740 tax specialists and/or income tax SMEs. RSM’s full year-end tax alert can be accessed here.

Required capitalization of research and experimental expenditures

The Tax Cuts and Jobs Act (TCJA) of 2017 requires companies to capitalize research and experimental (R&E) expenditures beginning with tax years beginning after December 31, 2021 (i.e., calendar year 2022 tax returns). Domestic and foreign capitalized R&E expenditures are amortized over five and 15 years, respectively. Prior to the TCJA, these expenditures were expensed and deductible in the year incurred.

In accordance with the provisions of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic 740, Income Taxes, the new capitalization and amortization requirements will generally result in a temporary difference, with offsetting increases/decreases in current and deferred taxes. There may also be other indirect effects on a company’s income tax provision. For example, companies that have historically incurred taxable losses will need to carefully consider the impact of this capitalization on current taxable income, utilization of net operating losses, and realization of deferred assets. Foreign entities should also consider the impact of the global intangible low-tax income (GILTI) inclusion, and its interaction with the R&E capitalization, on their 2022 income tax returns and financial statements.

Limitations on interest expense under section 163(j)

Under section 163(j), a taxpayer's interest expense deductions are generally limited to 30% of adjusted taxable income (ATI). The determination of ATI no longer includes an add-back for depreciation, amortization, or depletion in tax reporting years beginning on or after January 1, 2022. Companies need to assess the impact of this change on both their 2022 income tax returns and financial statements.

Inflation Reduction Act (IRA)

The Inflation Reduction Act (IRA) of 2022 includes a corporate alternative minimum tax (CAMT) effective for tax years beginning on or after January 1, 2023, that applies to each of the following:

  • Corporations (excluding certain entities, as defined) with a three-year average adjusted financial statement net income (as defined) exceeding $1 billion, or
  • Domestic (U.S) corporations (excluding certain entities, as defined) that are part of a controlled group with a foreign parent, where the aggregate three-year average adjusted financial statement income (as defined) for such domestic corporations exceeds $100 million, provided that the three year average total adjusted financial statement income of the controlled group exceeds $1 billion.

The IRA also includes a new tax on public companies that repurchase their shares after December 31, 2022. This tax is not an income tax accounted for under ASC 740. Instead, the tax should be accounted for as a cost of the stock repurchase (i.e., within equity).

While the provisions of the IRA are effective for periods beginning on or after January 1, 2023, reporting entities should consider whether disclosures are required within their 2022 year-end financial statements.

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