Tax accounting considerations of the Treasury “Green Book”
June 2021
In brief
On May 28, the Department of the Treasury released the General Explanation of the Administration's Fiscal Year 2022 Revenue Proposals (“Green Book”), outlining a number of proposed amendments to the Internal Revenue Code (“IRC”), including significant changes for corporate taxpayers. For a detailed discussion of the Green Book, including explanations of the Administration’s business tax proposals, see PwC Tax Insight, Treasury ‘Green Book’ describes Biden’s tax proposals for businesses, June 4, 2021.
Among other considerations, these proposals represent changes to existing corporate tax regimes, and have important implications from both an income and non-income tax accounting perspective. Since the accounting impacts of a change in tax law are required to be accounted for on the date of enactment, companies should be preparing for the potential changes. To aid in the assessment of the financial reporting implications, we summarize below key proposals from the Green Book, along with related accounting for income tax considerations under US GAAP.
Observation: The specific details and timing of potential tax law changes remain uncertain since President Biden’s tax increase proposals will need the support of all 50 Democratic Senators and nearly all House Democrats to be enacted over the expected objections of Congressional Republicans. For example, moderate Democrats in the House and Senate may seek to scale back some of President Biden’s proposals and may seek to block others. At the same time, President Biden and Democratic Congressional leaders have indicated that they are seeking to complete action on the Administration’s proposals before the end of 2021.
Overview - accounting for changes in tax law
ASC 740 requires that the effects of a change in tax law or rates be recognized in the period that includes the enactment date. For US federal tax purposes, the enactment date is most often the date the President signs the bill into law. From a state and local income tax perspective, it will be important for companies to understand how each jurisdiction adopts or otherwise conforms to the IRC (e.g., adoption of the IRC as of a specific date, “rolling conformity” that adopts federal amendments automatically, or other approaches).
The total effect of changes in tax laws or rates on current and deferred tax balances are recorded as a component of the income tax provision related to continuing operations in the period in which the law is enacted, even if the assets and liabilities relate to other components of the financial statements, such as discontinued operations, a prior business combination, or items of accumulated other comprehensive income.
To the extent that an enactment date occurs within an interim accounting period, companies will be required to determine what impact(s) of the federal amendments are recognized through the annual effective tax rate and what should be recorded discretely in the period of the enacted change in tax law.
The takeaway
Companies should stay abreast of current legislative developments and evaluate the potential implications that these developments may have on their business, including financial reporting, to ensure they are prepared to account for these changes in the period of enactment
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