How Does the American Recovery and Reinvestment Act of 2009 Affect Your Company's Accounting for Income Taxes?
Whenever new tax legislation is enacted (federal, state, or foreign), a company needs to evaluate the potential impact that these changes could have on its accounting for income taxes.
The American Recovery and Reinvestment Act of 2009 ("Stimulus Plan") contains, among other items, changes to bonus depreciation provisions, cancellation of debt income, interest expense rules, and business credits that should all be considered.
Newly enacted legislation could affect a company's effective tax rate applied to deferred tax assets and liabilities originally recorded in periods prior to the enactment date. It could also modify effective tax rates in current and future periods and possibly affect the realizability of the deferred tax assets. Generally, Financial Accounting Standard 109 ("FAS 109") requires that the impact on the financial statement of newly enacted tax laws be reflected in the period in which the law is enacted, whether retrospectively or prospectively applied. Thus, the resulting expense or benefit of a rate change would be applied to the deferreds and reflected in the period of enactment. This would also be the case if the changes result in a different conclusion as to the realization of deferred tax assets.
Determining the potential impact of the various new tax law changes on the income tax provision begins with a thorough analysis of the specific changes that could apply to the taxpayer. The alternatives and elections available are then applied to the specific facts of the company to arrive at the expected tax results that must then be accounted for pursuant to FAS 109.
Below are some thoughts on how the provisions contained in the recently enacted Stimulus Plan could impact a company's accounting for income taxes.
The 50-percent bonus depreciation provision of IRC Section 168(k) enacted in 2008 has been extended through 2009 (2010 for longer-lived and transportation property) and applies for both regular and alternative minimum tax ("AMT") purposes. Additional deductions created by this bonus depreciation may create a 2009 taxable loss for a company that may be carried back to an earlier tax year to obtain a refund.
When evaluating situations where the Section 108(i) COD-income deferral is available, companies should also review for possible IRC Section 382 ownership changes in connection with a reacquisition of debt.
Alternatively, a company could elect to forgo the bonus depreciation and increase its research credit or minimum tax credit limitations by 20 percent of the amount of the bonus depreciation forgone. This election provides a company in a loss or AMT position an opportunity to convert an additional six percent of its pre-2006 unused or expiring research credits and AMT credits into currently refundable credits. It may be possible for a company to record a financial statement benefit for the realization of deferred tax assets that have been subject to a valuation allowance.
The Stimulus Plan provides a potential opportunity to defer recognizing taxable income due to cancellation of debt ("COD") income under IRC Section 108(i). Taxes due on COD income with respect to certain debt reacquired during 2009 may be deferred until 2014. The COD income on these applicable debt instruments is recognized 20 percent per year from 2014 through 2018. This new provision creates the potential for additional tax planning opportunities for enterprises with depressed stock values or significant net operating losses ("NOLs"). Companies may elect out of this deferral and recognize income to offset NOLs that might expire before 2014.
When evaluating situations where the Section 108(i) COD-income deferral is available, companies should also review for possible IRC Section 382 ownership changes in connection with a reacquisition of debt. These ownership changes could limit the offset of NOLs against future taxable income. Thorough analysis is required to determine the current and long-term effects of these various rules and elections on cash flow, as well as the potential impact on the accounting for income taxes and increases/decreases to the valuation allowance.
The applicable high-yield discount obligation ("AHYDO") rules under IRC Section 163(e) defer the interest expense deduction related to debt instruments with significant original issue discount and may recharacterize a portion of the interest expense as a non-deductible dividend payment. The Stimulus Plan suspends the AHYDO provisions for certain debt issued between September 1, 2008 and December 2009, and allows a company to fully deduct its accrued interest expense. This suspension could impact the company's effective tax rate, by eliminating the non-deductible dividend (formerly a permanent adjustment). It could also affect the company's current and deferred tax provisions, as all interest accrued during the period would be currently deductible, i.e. no portion would be deferred.
The Stimulus Plan provides additional opportunities for work opportunity tax credits and energy related credits. Companies will need to evaluate whether they qualify for more tax credits than previously and reflect the increases in their quarterly effective tax rate computations.
In summary, companies need to evaluate tax law changes enacted by all jurisdictions in which they are taxed and determine the current year's effective tax rate to be applied against income. Additionally, companies must evaluate the potential impact on their beginning-of-year deferred tax assets and liabilities, including any changes that could affect the realizability of their deferred tax assets.
