Thanks to the help of the Financial Accounting Standards Board, more American jobs may stay in America in the near future.
The FASB action came in the form of two staff positions that clarify accounting for corporate income taxes under the American Jobs Creation Act of 2004.
The staff positions bring Statement 109, Accounting for Income Taxes, into line with provisions of the act. The act was passed to provide financial incentives for companies to keep a wide variety of jobs inside the United States.
"We had a few constituents, including Congress, ask us to consider accounting guidance on this particular deduction," explained FASB practice fellow Jim Geary.
Statement 109 deals with, among other things, deductions for production activities. The staff position, labeled Financial Accounting Statement 109-1, provides a tax deduction proportionate to qualified production activities. After the deduction is phased in, it would allow a deduction of up to 9 percent of either qualified production activities income or taxable income after the deduction for the utilization of any net operating loss carryforwards, whichever is less. The deduction can be as high as 50 percent of the W-2 wages paid by the corporate taxpayer.
The issue to be resolved was whether the deduction would be accounted for as a tax rate reduction or a special deduction. FASB concluded that the deduction's characteristics were most similar to the special deductions illustrated in Statement 109, which deal with the future performance of specific activities, including the level of wages.
The position noted that the special deduction should be considered in measuring deferred taxes when graduated tax rates are a significant factor, and in assessing whether a valuation allowance is necessary.
Geary said that FASB wanted to set a standard to prevent inconsistent application, but the choice of specifying special deductions was largely an effort to reduce the burden of accounting.
"If you took this deduction as a rate reduction, you would need to re-measure all your existing deferred tax assets and liabilities at that lower rate, which could be a lengthy scheduling exercise, to determine what that rate would be, and you'd need to do that every year," Geary said.
The AJCA also granted companies that pay taxes in the United States a one-time tax deduction of 85 percent of certain foreign earnings that are repatriated in a tax year that began within a year before or after the enactment date. The deduction applies to funds that are used to continue manufacturing inside the U.S., and chief executive officers will be required to certify that funds would be appropriately applied.
Statement 109, however, was unclear on how to account for taxes to be paid during this opportunity to take advantage of the one-time deduction.
Prior to the enactment, companies did not have to pay taxes on foreign earnings that were not brought back into the United States, and they would not have to be accounted for as long as no such repatriation was intended. If companies did not declare an intention to leave foreign earnings overseas, however, the company's accounting would have to show accruing income taxes payable by the investor.
The issue that FASB staff considered was whether an enterprise should be allowed additional time beyond the financial reporting period in which the act was enacted to evaluate the effects of the act on the plan for reinvestment overseas or remittance to the U.S.
The staff's decisions do not affect actual taxes paid, only the accounting for accrued taxes.
Geary said that most companies - by far the majority - don't provide taxes on their unremitted foreign earnings, because they use the exception in Statement 109 that allows them not to recognize taxes because the money will remain overseas indefinitely. The Jobs Act, however, has led many companies to consider repatriation of their overseas funds. As it tends to take time to make such a decision, companies were unsure when they had to declare their intentions.
Recognizing a lack of clarification of certain provisions within the act and the timing of the enactment, FASB staff concluded that an enterprise should be allowed time beyond the reporting period of enactment to evaluate the act's financial impact.
"We saw that this is unusual to have something this significant, and there was a lot of language that had to be clarified in the act for companies to be able to make a decision," Geary said. "We issued this position to give companies more time to consider bringing this stuff back into the country and not provide for taxes during the time they consider what to do."
Companies that have not reached a decision on repatriation must make several discloses, including the status of the evaluation of the hypothetical effects of the act and the expected completion date of the evaluation. If a company makes its decisions in stages, it must disclose the effect on income tax expense for any amounts recognized under the repatriation provision.
Both staff positions are effective upon issuance.
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