ASC 740-10 Reserve Mitigation
“Resolving Uncertainty”
Public companies must account for income tax uncertainty under ASC 740-10 for years beginning after December 2006. For many companies ASC 740-10 presents complex state income tax issues, with overlapping considerations – often resulting in significant reserve balances.
Rather than providing ASC 740-10 accounting support services, our firm focuses on assisting companies with the ASC 740-10 reserve that has now been established. For example, a company filed protective refunds for sales that, prior to ASC 740-10, had been thrown back to the state of origination. Throwback was no longer required the company implemented voluntary disclosure processes in destination states.
ASC 740-10 mitigation results in meaningful tax rate reductions – because the recognition of previously unrecognized tax positions post-ASC 740-10 may be taken into income. This rate reduction is unique, since the initial ASC 740-10 reserve was booked against retained earnings.
Post-ASC 740-10 Planning
In a post-ASC 740-10 world tax executives are realizing that the pre-ASC 740-10 structure may actually lead to greater taxes or at a minimum present an unnecessary level of complication – with little or no book tax benefit. For example, what value is an intangibles holding company if the company has to provide for economic nexus, royalty add-backs and similar anti-passive investment company tactics? Moreover, is it acceptable to live with a system that requires the un-ending posting of economic nexus with no statute of limitations tolling on the horizon? Perhaps the company faces the prospect of having to double-book exposure on the same intercompany item. For example, a holding company may create an ASC 740-10 reserve for economic nexus, and the entity paying the royalty may have to provide tax on the add-back of that same royalty.
In view of the foregoing, many companies have an opportunity – to simplify structure, mitigate ASC 740-10 reserves, and sometimes lower the effective state tax rate. We have extensive experience in assisting companies – not only with determining the alternatives to current structure, but with designing and implementing better structures.
