ASC 740 Tax Provision Guide
Find answers to common technical questions and process challenges that arise when calculating your ASC 740 income tax provision.
Calculating the ASC 740 provision for income taxes can be a difficult technical challenge for tax practitioners. The market’s most powerful tax provision software provides an accurate calculation, intuitive design, and thorough footnotes. See how Bloomberg Tax Provision untangles ASC 740’s complexity.
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How to create a consistent income tax provision process
The corporate income tax provision process can be complicated and has the potential for inaccuracies.
Public and private companies must submit quarterly and annual provisions for income tax. Not only are they among the most-scrutinized processes for most tax departments, but they also have the added complication of a short time frame for execution. This creates a host of inaccuracy risks and potential control failures. Therefore, data organization and understanding tax law implications are crucial for ensuring a smooth tax provision process.
Also essential to the process is understanding its flow so you can quickly and specifically address any issues that arise.
The following three-step checklist can help ensure a consistent tax provision process, including when evaluating uncertain tax positions.
Step 1: Determine the tax provision process flow
The tax provision process flow is affected by three distinct but related elements:
- Corporate facts – Legal structure, jurisdictions, general ledger, and other data that affect the tax provision process but exist independent of tax.
- Tax law – The body of law written by the tax authorities, including foreign tax credits, GILTI, and R&D credits.
- ASC 740 – Its own separate body of rules written by the Financial Accounting Standards Board (FASB). It interacts with the preceding elements but also has requirements separate from them.
Each piece is related but separate, and it’s important to be specific about where your pain points are occurring in the flow. For example, you might be experiencing a problem related to stock compensation, which could be due to several scenarios:
- Your general ledger information is incorrect. The data supporting the stock compensation deduction isn’t tied out or isn’t rolling forward.
- You’re making a mistake in applying tax law to your facts. Your reports are accurate, but your error is in calculating the book-to-tax differences.
- The data is sound, and you know how to calculate based on tax law, but you can’t get your tax provision to tie out the right way.
By differentiating which part of the flow is causing the issue, you’ll more quickly find the best way to address it. Below we’ll demonstrate how to follow the flow to create checklists for all areas of ASC 740.
Step 2: Maintain an uncertain tax positions checklist
One of the most important tasks related to uncertain tax positions is ensuring you have a consistent evaluation process. Use the flow outlined above to maintain a checklist of questions, narrowing from legal and company facts to ASC 740-specific info.
a. Have the laws or regulations changed for this jurisdiction?
- Business facts
a. Has my business changed in this jurisdiction?
b. Have I acquired business in this jurisdiction?
c. Have I changed my operating structure, or have I done new types of sales or new expansions?
- Tax authority activity
a. Have income tax authorities opened or closed any exams?
b. Have any statutes expired?
c. Have there been any inquiries or notices not necessarily reaching the level of an exam?
a. When I filed my income tax return, did I take a position contrary to what I had thought I would take on the provision?
- Tax planning
a. Am I performing technical writing supported by tax law to document why I’m taking a particular position? If so, you may be dealing with a position that is not highly certain. That doesn’t mean it results in an uncertain tax benefit, but it probably reaches the level of going through the uncertain tax benefit analysis and evaluation.
You can use these questions as a filter to answer the question: “do I have an uncertain benefit item that I need to account for?”
Step 3: Analyze valuation allowance through the tax provision flow
Again, the ASC 740 valuation allowance (VA) process moves through the same flow – facts about the company/jurisdictions, to tax law, to ASC 740.
- Company facts – Does the company compute forecasts? Do we have historic and/or forecasted earnings?
- Tax law – Will we produce enough earnings to use tax credits, NOLs, or other tax elements?
- ASC 740 – If I apply the tax law, can I use the attribute or the deferred tax asset? This leads to the ASC 740 conclusion – I need a valuation allowance, or I don’t.
Problems with VA can occur in any of these three areas. For example:
- Are you experiencing difficulties because the forecasting team isn’t providing information by legal entity?
- Are you struggling with tax law calculations due to needing more technical knowledge?
- Do you already know you need a VA, and the challenge is managing the deferred roll-forward schedule?
Rather than simply acknowledging “We have a problem with VA,” evaluating through the lens of the tax provision flow will help streamline your problem-solving process.
Navigate the ASC 740 tax provision with confidence
These are just some examples of the many moving parts to track when calculating the provision for corporate income tax under ASC 740. Staying on top of changes to tax laws and regulations, developments in your corporate structure, and vast amounts of data is complicated. Our easy-to-use Essential Guide to ASC 740 breaks down the steps and helps you navigate the biggest hurdles with background, details, and examples of how ASC 740 interacts with various tax laws and corporate facts.
While you can do these analyses and tax provision calculations through a patchwork of Excel spreadsheets and manual work, you’re still left with a lot of room for error. Watch our on-demand webinar on Moving Beyond Excel to learn how these complex technical accounting and manual process issues can be effectively managed with the right tools and software.
Bloomberg Tax Provision simplifies your ASC 740 workflow using a balance sheet approach to comply with U.S. GAAP technical requirements and ensure your rate rec always ties, updates are real-time, and your reporting is audit ready. Learn how Novo Building Products simplified its spreadsheet-heavy tax provision process with Bloomberg Tax Provision.
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