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Tax Reform and Deferred Taxes: What you NEED to know

Based on recent laws and pronouncements, deferred taxes have been affected by two new changes: a new corporate tax rate and a new FASB update.

The corporate tax rate comes as a result of the Tax Cuts and Jobs Act, where the rate has been reduced to a flat rate of 21% as of January 1, 2018. Calculating current taxes due at December 31, 2017 will not be impacted by the new legislation. However, when evaluating deferred taxes, the reduced rate of 21% will need to be applied. This new lower rate could drastically affect deferred tax asset and liability balances between periods. More importantly, for calendar year taxpayers, the income statement effect of those changes will impact 2017 financial results.

The Financial Accounting Standards Board (FASB) issues updates periodically to the Accounting Standards Codification. One such update, Accounting Standards Update (ASU) 2015-17 regarding the classification of deferred taxes, became effective for public business entities in calendar year 2017 and will become effective in calendar year 2018 for all other entities.

FASB has an ongoing Simplification Initiative, charged with the goal of reducing complexities in existing accounting guidance. This ASU is a result of this initiative. Current guidelines state that entities separately classify deferred tax assets and liabilities on their financial statements as either current or noncurrent. The new requirements will have entities disclose deferred taxes simply as noncurrent assets or noncurrent liabilities on the balance sheet. The existing principle of netting the components making up deferred tax assets and liabilities against each other to present a single amount will remain in place. However, this amount will now be classified as only noncurrent.

Non-public entities can choose to adopt these provisions early (when reporting for the 2017 calendar year) or wait until the 2018 effective date. Changes may be applied to all periods presented on the financial statements (retrospective approach) or beginning in the year of application going forward (prospective approach). Regardless of the year of application, disclosures regarding the change in accounting principle will be required. Entities should also consider the potential impact on any debt covenants, as asset or liability balances will be shifting from current to noncurrent and could affect certain financial covenant calculations.

The information above only brushes the surface of this important legislation and its rippling effect. If you would like to know more information about these changes and how they directly affect you, please contact us at thebottomline@ellinandtucker.com and one of our Audit and Accounting professionals would be happy to speak with you.

Zachary Bromwell HeadshotZACHARY E. BROMWELL, CPA, MBA, is a manager in the Audit, Accounting and Consulting Department. Zach brings nearly a decade of expertise in providing financial statement audit, review and compilation services, as well as employee benefit plan audits, for clients in numerous industries, including construction, distribution, government contracting, manufacturing, real estate and technology. Zach is also a member of firm’s Audit and Accounting Technical Standards Committee, which is responsible for communicating technical guidance to firm personnel, management and ownership. He can be reached at zbromwell@ellinandtucker.com.

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