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Print Edition StoriesMonday, January 18, 2010
Rule changes impact private company income tax reporting
By Jeffrey D. Solomon, CPA and partner, Levine, Katz, Nannis & Solomon PC
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It’s time for private companies to be aware of FIN 48. The accounting rule requiring more stringent and detailed disclosures for income taxes originally came out in 2006. However, due to a public outroar, it was postponed for private company reporting until now. FIN 48 became effective for private companies for fiscal years beginning after December 15, 2008.
Some of the major issues that the original pronouncement required have been somewhat relaxed, but private companies will still be pushed hard to comply with the revised standard. The core to this standard mandates that companies that have taken aggressive or questionable tax positions need to accrue for the potential that a qualified taxing agent audits their returns and finds fault with how they were prepared.
The most controversial issue that accountants had with the new standard was that the Internal Revenue Service would use the financial statement disclosures to hone in on aggressive or potential controversial tax positions taken by a company. The new standard uses a “more than likely than not” criteria in assessing whether a tax position, if under review in an IRS or state tax audit would have an unfavorable outcome to the company, If so, the company would be required to accrue the liability and interest and penalties as well. The liability would be classified on the balance sheets as a long-term liability, unless expected to be paid within 12 months.
The Financial Accounting Standards Board agreed to exempt private companies from some disclosure requirements that public companies need to disclose such as the tabular reconciliation on unrecognized tax benefits from the beginning to end of the year and their impact on the effective tax rate. However, private companies must still disclose:
*The total amount of interest and penalties in the current year
*The nature of uncertainty and event that would cause the change, to the extent that the amount of unrecognized benefits will change in 12 months
*A description of tax years that are open by taxing authorities
Management in privately held companies needs to consider certain exposure areas where they could be taking somewhat aggressive tax positions in such as:
*State income and franchise taxes (i.e. nexus issues)
*382 NOL limitations due to ownership changes
*R&D credit calculations
*Transfer pricing
*Timing differences such as deprecation and cost capitalization thresholds.
For those companies not willing to adopt FIN 48, a GAAP exception will be required. While it is still unclear how management will assess the exposure areas for their outside accounting firms, it is clear that both parties will be struggling this reporting year in applying and adopting FIN 48.
Jeffrey D. Solomon is a CPA and partner at the accounting and business consulting firm of Needham-based Levine, Katz, Nannis & Solomon PC. He can be reached at jsolomon@lknscpa.com.
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