Accurately accounting for income taxes within financial statements is challenging, especially for mature businesses with complex financial infrastructures. It’s vital to adhere to reporting requirements, including necessary disclosures, all on a tight timeline.
To ensure accurate tax provisions, many businesses choose to work with a firm that provides outsourced tax provision services. These teams work together with a wide range of stakeholders, from the business’s internal finance department to third-party auditors and compliance teams.
Tax provision professionals are tasked with preparing schedules, footnotes, and other documentation that both presents and supports the tax provision.
The presence of an accurate tax provision in financial statements is vital. Calculating them is far from easy: many parties are involved, technical challenges are common, and the underlying numbers are constantly changing.
This article covers some of these challenges in greater depth. We will also outline the wider tax provision process and explore how Smith and Howard’s tailored approach to tax provision engagements delivers accurate outcomes for the businesses we serve.
A tax provision is a calculation of the income tax expense that a business is liable for in a financial reporting period. For businesses to produce accurate financial statements for financing partners and investors, they must have an accurate accounting of their tax liabilities for the statement period.
Businesses typically produce their financial statements using Generally Accepted Accounting Principles (GAAP), the accounting standard adopted by the Financial Accounting Standards Board (FASB). ASC 740 of GAAP outlines the guidance businesses should follow when reporting income tax positions on financial statements.
Recording an accurate tax provision is of paramount importance for all businesses. Mistakes could cause the business to have to restate historical financial statements at a later date––something no business wants to ever have to do.
While the calculus of applying an income tax rate to a net income figure seems straightforward, tax provisions are a complex area of accounting that demands significant expertise. To ensure accuracy, many companies bring in an external tax provision expert to work closely with their finance department, auditors, and other partners. The guidance of an experienced tax firm significantly streamlines the tax provision process.
Producing accurate tax provisions demands a high degree of accounting knowledge. There are two main categories of challenges in tax provision: technical challenges and process challenges.
Navigating the technical challenges of tax provisions can be challenging. These include interpreting rules around unrealized Other Comprehensive Income (OCI), purchase accounting, reconciling payable accounts, and consolidating financial information from different sources into one global view. A skilled tax provision expert can navigate these technical challenges with little issue. However, more complex challenges are to be found in the tax provision process itself, rather than the technical details.
Tax provisions often must be completed in short periods of time with non-negotiable deadlines. In these accelerated timelines, both businesses and their service providers must have robust systems that make for a streamlined tax provision process.
Issues frequently stem from misaligned expectations which result in stressful situations unfolding as deadlines grow closer. It’s incumbent on the firm preparing the tax provision to understand the deliverables their client needs to receive, how they want to receive them, and when they need to receive them.
At Smith + Howard, our tax provision specialists realize the complexity of this process and have the sophistication required to ensure an accurate and timely process. With years of experience supporting the tax provision needs of many businesses, we bring advanced insights and proven judgment to each engagement, and are equipped to serve businesses across a variety of industries and sizes.
Every tax provision process is different. Regardless of whether you’re a small privately held business or a global enterprise, you need a tax provision partner you can trust. At Smith and Howard, we embrace a flexible approach to tax provision engagements that enables us to best serve the needs of our clients.
Perhaps you’re a Controller looking to outsource the entire process. Alternatively, perhaps you need a tax provision expert that can partner with your tax preparation firm. Whatever the case, our team is set up to deliver a customized approach that best serves your needs.
Throughout the tax provision process, it’s crucial to keep your audience in mind. These end users, including executives and board members, are crucial stakeholders in the wider process. In some instances, they require financial statements that are SEC-ready and contain detailed disclosures. In other instances, the detailed disclosures around the provision are not required. Having the ability to adapt to the evolving needs of these stakeholders is crucial.
At Smith and Howard, our tax provision team focuses on bringing an agile approach that can be adapted to the needs of every business we serve. Rather than adopting a prescriptive, rigid approach, our goal is to align expectations and build a robust system that ensures a consistent tax provision process year after year.
What does that mean in practice? If a business needs light support, either reviewing a template or helping build an internal process, our team can help. If a business needs us to contact their service providers, generate taxable income calculations, and provide a footnote for their financial statements, our team can provide that too.
Our team is well-aware of the importance of delivering an accurate tax provision and is equally concerned with ensuring deadlines are met. Judgment plays an important role in understanding how to balance accuracy with deadlines to best serve our clients.
Generating an accurate tax provision demands the expertise and resources of a sophisticated firm but also requires a flexible approach that takes account of the unique needs of your business. It’s our mission to strike this balance and deliver our partners an accurate tax provision in a timely manner.
To learn more about Smith + Howard’s expert tax provision services, contact an advisor.
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR