With the enactment of US tax reform legislation likely this year, regulated entities will need to consider a number of financial reporting issues. The House of Representatives passed the ‘Tax Cuts and Jobs Act’ (the House bill) on November 16, 2017, by a 227 to 205 vote. On December 2, 2017, the Senate, by a 51 to 49 vote, approved its own version of the ‘Tax Cuts and Jobs Act’ (the Senate bill), which differs in key aspects from the House-passed tax reform bill. A House and Senate conference committee is now working to reconcile these differences with the hope that the ‘Tax Cuts and Jobs Act’ will be enacted before the end of December 2017.
Proposals under both the House and the Senate bill would result in significant changes to existing US tax law in many areas including corporate tax rates, business deductions, and international tax provisions. Such a major overhaul of the US tax code (Code) is not without its challenges, including significant impacts on financial statement reporting. Considering there is no grace period for recognizing the tax effects in the period of enactment, companies should be preparing for the potential change. To aid in the assessment of the financial reporting implications for power and utility companies, we discuss below key considerations around normalization of excess deferred income taxes for regulated entities.
The House and Senate bills both would reduce corporate income tax rates from 35% to 20%, and they both contain language for how the reduction in rates should be treated for existing ADIT balances to comply with the normalization rules pertaining to method/life depreciation differences for public utility property. Regulated utilities will need to comply with these provisions to continue to avoid a normalization violation. Book/tax differences other than method/life depreciation differences are not subject to the normalization rules. As a result, there may be diversity in how these excess ADIT are treated by each jurisdiction.
Tax Partner, PwC US