Preparing carve-out tax provisions after the new tax reform legislation

16 April, 2018

Michael Niland
US Divestitures Services Leader, PwC US
Trevor Wade
US Tax Partner, PwC US

By nature, preparing carve-out financial statements is complex. Accounting rules and guidance is limited, leaving much open to interpretation. Time and time again, our clients tell us that preparing carve-out financial statements, including the carve-out tax provision, often prolongs the entire divestiture transaction. First and foremost, preparers of carve-out financial statements for taxable entities must stay current on the changing tax laws and be sure to comply with ASC 740, Income Taxes.

On top of these challenges sits the new tax legislation that was enacted at the end of 2017. The new laws will definitely impact deals and there is a lot of speculation about what will happen as a result of these changes. PwC has been at the forefront of this topic, helping to explain the changes and providing commentary on what this means for companies navigating deals.

We recently developed a report titled, Preparing carve-out tax provisions: Considerations under current tax law, that explains ten key principles that will help enable preparers to manage a carve-out tax provision process with more ease. We want to share of few of these considerations here to give you an idea of what to expect.

Five things you should know before preparing carve-out tax provisions:

  1. US tax reform – The passage of the 2017 Act will create additional complexity and judgments in preparing the carve-out tax provision. Many of the new tax laws require calculations to be completed at the consolidated tax return level, which will create challenges when applying the preferred carve-out tax provision method, the separate return method, or other tax allocations methods.
  2. Understanding the data – Generally, carve-outs will require data and calculations at a more granular level, compared to the parent company. Preparers should assess areas of the carve-out provision where the completeness and accuracy of financial statement assertions need to be reassessed for the carve-out tax provision.
  3. The SEC prefers the separate return method – Under the separate return method, the carve-out entity calculates its tax provision as if it were filing its own separate tax return based on the pre-tax accounts included in the carve-out entity.
  4. Impacts of tax sharing agreements – Companies that file consolidated tax returns often have tax sharing agreements that govern the intercompany settlement of tax obligations. The difference between tax allocation method and the tax sharing agreements typically are reflected in equity.
  5. The issue of materiality – Preparation of the carve-out provision will necessitate a fresh look at materiality, as the materiality threshold for the carve-out entity will be different than that for the consolidate parent.

Be sure to read our full report for a deeper explanation of all the considerations that can help you navigate the carve-out tax provision process.