Recent events may have a significant effect on a company’s 2022 tax provision and how a company approaches 2023 tax considerations. This high-level update focuses on 2022 tax law changes as they relate to the effect on financial statements.
Beginning January 1, 2022, the IRC Section 163(j) interest limitation no longer includes an add-back for depreciation, amortization or depletion. The change could significantly reduce the interest expense deduction and affect net operating losses, interest limitation carryforwards and current taxable income.
Beginning in 2022, no deduction is allowed for research and development expenditures; the taxpayers shall amortize these costs ratably over five years for domestic and 15 years for foreign research expenditures. The resulting impacts on the financial statements include a new deferred tax asset.
The Inflation Reduction Act includes a corporate alternative minimum tax that applies to certain corporations with an average financial statement income exceeding $1 billion. The minimum tax applies to tax years beginning in 2023 and would create a new 15% minimum tax. A deferred tax asset would be recognized for unused AMT credit carryforwards that could be used as a credit against future tax liabilities.
The Inflation Reduction Act also includes a new tax on publicly traded corporation stock buybacks beginning in 2023. This is not an income tax under ASC 740 and is accounted for in the equity section of the balance sheet.
The Inflation Reduction Act increases the payroll/FICA refund on IRC Section 41 R&D credits from $250,000 to $500,000 for certain applicable smaller companies with less than $5 million in gross receipts in the current tax filing year.
Bonus depreciation will drop to 80% in 2023. This will result in an impact on deferred tax balances. Read more on bonus depreciation rules in this article.
The Organisation for Economic Co-operation and Development (OECD) created a plan that imposes a global minimum tax rate of 15% for large businesses with multinational operations. Eligible businesses will now pay the minimum tax rate on income arising in jurisdictions with a minimum tax rate below 15%.
South Korea has taken steps to enact these rules and it is expected that other jurisdictions will follow. The FASB has taken the position that any incremental effects of such minimum taxes would increase the tax payable and not be reflected in deferred taxes.
During the fourth quarter of 2022, the FASB voted to issue a proposal during the first quarter of 2023 that would require companies to provide greater insight into income taxes paid in the United States and in foreign jurisdictions. The new rules could be issued later in 2023.
The FASB has tentatively proposed making changes to the rate reconciliation included in the financial statement tax footnotes of publicly filed entities. Tax effects of state and local income taxes and the impact on foreign operations would be included in a separate line item and the remaining line items would primarily reflect domestic tax items. Many companies already have separate line items for state taxes, however the separation of foreign tax items into one line could be a significant change for some companies.
The FASB is also proposing changes to rate reconciliation disclosures for non-public entities. However, the proposed disclosure requirements for private companies will not be as extensive as they would only need to provide qualitative disclosure about specific categories and individual jurisdictions. The new rules could be issued later in 2023.
Currently, there is no universal approach or requirement under the SEC to whether pretax income or loss from continuing operations is disclosed before or after intra-entity eliminations in the tax footnote. The FASB is proposing a change to this disclosure and new rules could be issued later in 2023.
We continue to monitor the changes mentioned above that are still in progress and will provide updates on these pages and through our Tax Strategist newsletter – subscribe here.
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