Checklists for Simplifying the Tax Provision Process

Know the tax provision process flow and be specific about pain points

The provision process flow is affected by three distinct but related elements:

• Corporate facts – legal structure, jurisdictions, general ledger and other data that affect the provision process but exist independent of tax.
• Tax law – the body of law that is written by the tax authorities, including items such as foreign tax credits, GILTI, and R&D credits.
• ASC 740 – its own separate body of rules written by 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 comp, which could be due to several different scenarios:

1. Your general ledger information is incorrect. The data that support the stock comp deduction isn’t tied out or isn’t rolling forward.
2. You’re making a mistake in applying tax law to your facts. Your reports are accurate, but your error is in the calculation of the book-to-tax differences.
3. The data is sound, and you know how to calculate based on tax law, but you can’t get your 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.

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.

1. Laws
   1. Have the laws or regulations changed for this jurisdiction?
2. Business facts
   1. Has my business changed in this jurisdiction?
   2. Have I acquired business in this jurisdiction?
   3. Have I changed my operating structure, or have I done new types of sales, new expansions?
3. Tax authority activity
   1. Have authorities opened or closed any exams?
   2. Have any statutes expired?
   3. Have there been any inquiries or notices not necessarily reaching the level of an exam?
4. Compliance
   1. When I filed my tax return, did I take a position that’s contrary to what I had thought I was going to take on the provision?
5. Tax planning
   1. Am I performing technical writing supported by tax law to document why I’m taking a particular position?
      1. 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.

These questions can be used as a filter to determine, “do I have an uncertain benefit item that I need to account for?”

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.

1. Company facts: Does the company compute forecasts?
   1. Do we have historic and/or forecasted earnings?
2. Tax law: Are we going to produce enough earnings to use credits, NOLs, or other tax elements?
3. ASC 740: If I apply the tax law, would I be able to use the attribute or the deferred tax asset? Which leads to the ASC 740 conclusion – I need a VA or I don’t.

Problems with VA could occur in any of these three buckets. Are you experiencing difficulties because the forecasting team isn’t providing info by legal entity? Are you struggling with the tax law calculations due to a need for more technical knowledge? Or do you already know you need a VA, and the challenge is in managing the deferred roll-forward schedule? Rather than simply acknowledging, “We have a problem with VA,” evaluating through the lens of the provision flow will help streamline your problem-solving process.