Article
What calendar year filers need to know about ASC 740-270 in Q1
April 4, 2024 · Authored by Dave Antoni, Jessie Ulrich
With the first quarter of 2024 closed, calendar year filers are preparing for their first quarter income tax provision and financial statement interim reviews by their auditors. Below we will highlight reporting considerations to keep in mind.
Applying the estimated annual effective tax rate (EAETR)
Each quarter, taxpayers calculate their expected annual income tax rate using their annual forecasted pre-tax book income or loss from continuing operations and applying expected permanent tax adjustments and expected temporary differences in determining expected annual taxable income.
The EAETR is then applied to the year-to-date pre-tax book income or loss from continuing operations in determining tax expense for the interim period before discrete items.
Where the EAETR computation includes expected temporary differences, the taxpayer may compute both a current EAETR and deferred EAETR applied to year-to-date pre-tax book income or loss for computing current and deferred tax expense or benefit for the interim period in rolling its current and deferred tax balance sheet accounts from prior year-end to the close of the interim period. Any tax-effected discrete items would be incorporated to calculate the total tax expense and effective tax rate for the period.
What qualifies as tax-effected discrete item?
Taxpayers are required to evaluate discrete items each quarterly reporting period and incorporate them into the total tax expense for the period. Discrete items are defined as significant unusual or infrequently occurring items, which may require analysis of the facts and circumstances, as well as the company’s history of similar transactions.
Examples of discrete items include, but are not limited to:
- Certain changes in valuation allowance
- Statute of limitations expirations
- Uncertain tax positions
- Tax rate changes
- Windfalls or shortfalls related to share-based compensation
To the extent there is a change in the valuation allowance on deferred tax assets (DTA) that existed at the prior year-end, the impact would be incorporated in the current period as a discrete item.
If there is a change to a valuation allowance related to temporary differences created in the current year, it would be included in the EAETR.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.