Updated January 18, 2013 (Originally released January 10, 2013)

Background

The American Taxpayer Relief Act of 2012 (the “Act”) cleared the House of Representatives and the Senate on January 1, 2013, and was signed into law by President Obama on January 2, 2013. Among other things, the Act permanently extends the reduced Bush-era income tax rates for lower- and middle-income taxpayers, allows the top rates on earned income and investment income to rise for wealthier households, permanently “patches” the individual alternative minimum tax, and increases the estate and gift tax rate for high-value estates. The Act also extends through 2013 an array of temporary business and individual tax provisions.

Business Income Tax Provisions of the Act

The Act extends through 2013 several expired or expiring temporary business tax provisions, commonly referred to as “extenders.” Provisions that expired at the end of 2011 are retroactively extended to the beginning of 2012. Some of the more significant extenders¹ include:

• Active financing income exception and controlled foreign corporation (CFC) look-through — The exception in Subpart F allowing deferral of the active financing income of a CFC engaged predominantly in banking, financing, or similar business activity expired at the end of 2011. The Act retroactively extends the exception through the end of 2013. Similarly, the Internal Revenue Service (IRS) rules for look-through treatment for payments between related CFCs expired in 2011. The Act retroactively extends the treatment through 2013.
• Research and experimentation credit — The credit for certain research and experimentation expenses expired at the end of 2011. The Act retroactively extends the credit through the end of 2013 and modifies the rules for (1) calculating the credit when there is a change of ownership for a portion of the trade or business and (2) aggregation of research expenses within a controlled group.
• Bonus depreciation — The Act extends for one year the 50 percent bonus depreciation for qualified property. The provision applies to qualified property placed in service before January 1, 2014 (before January 1, 2015, for certain longer-lived and transportation assets).
• AMT credit in lieu of bonus — In addition, the Act provides for another temporary election to accelerate some alternative minimum tax (AMT) credits in lieu of bonus depreciation for property placed in service in 2013. This election allows corporations to effectively “monetize” a portion of their AMT credits in lieu of claiming bonus depreciation.
• Leasehold improvements — The Act retroactively extends the 15-year straight-line cost recovery for certain leasehold, restaurant, and retail improvements, as well as for new restaurant buildings that are placed in service before January 1, 2014. The provision had originally expired at the end of 2011.

Income Tax Accounting Implications

Under ASC 740, Income Taxes, the effects of new legislation are recognized upon enactment, which in the U.S. federal jurisdiction is the date the president signs a tax bill into law. Although many of the extenders are effective retroactively for 2012, entities should only consider currently enacted tax law as of the balance sheet date in determining current and deferred taxes. For calendar-year-end reporting entities, this means that both the retroactive tax effects for 2012 and the tax effects for 2013 will be recognized in the 2013 financial statements.

Interim Period Reporting Considerations

During the first quarter of 2013 (i.e., the period that includes the enactment date) for calendar-year-end reporting entities, any amounts pertaining to the retroactive effects for 2012 would be recognized as a discrete item and would not be reflected in the 2013 estimated annual effective tax rate (AETR). Similarly, the tax effects on deferred tax liabilities (DTLs) and deferred tax assets (DTAs) as of the enactment date would not be apportioned among 2013 interim periods through an adjustment of the AETR. Rather, only the tax effects of the new law on taxes currently payable or refundable for 2013 and on changes in deferred taxes after the enactment date would be reflected in the 2013 AETR.

For noncalendar-year-end reporting entities, the retroactive legislation can also affect current-year-to-date tax expense or benefit. During the interim period that includes the enactment date, the effect on the current annual accounting period is generally recognized by updating the AETR and recognizing a catch-up adjustment.

See paragraphs 3.265 through 3.276 of Deloitte’s A Roadmap to Accounting for Income Taxes for additional discussion and examples of accounting for changes in tax laws and rates and paragraphs 9.30 through 9.36 for additional discussion about accounting for such changes during interim periods.

Intraperiod Allocation

For both calendar and noncalendar-year-end reporting entities, the effect of the tax law change on prior-year taxes and on DTAs and DTLs existing as of the enactment date would be presented as a component of income tax expense or benefit from continuing operations. The effects of changes in tax law on items not included in income from continuing operations (e.g., discontinued operations, other comprehensive income) arising in the current year and before the enactment date should be included in the current interim period as part of income from continuing operations. The effect of the change on total tax expense or benefit (current and deferred) related to post-enactment income would be allocated between continuing operations and other financial statement components in accordance with the intraperiod tax allocation rules in ASC 740-20.

Classification of DTAs or DTLs as Current or Noncurrent

An entity that presents a classified balance sheet must classify DTLs and DTAs as either current or noncurrent on the basis of the financial accounting classification of the related liability or asset for which a temporary difference exists. A DTA or DTL that is not related to an asset or liability for financial reporting purposes, such as the deferred tax consequences related to an operating loss or a tax credit carryforward, is classified in accordance with the DTA’s or DTL’s expected reversal or utilization date. The effect of a change in tax law on the current or noncurrent classification of a DTA or DTL that is not related to an asset or liability for financial reporting purposes should be recognized in the financial statements for the interim or annual period that includes the enactment date.

Realizability of Deferred Tax Assets

An entity should not consider changes in tax laws or rates when assessing the realizability of DTAs before the period in which the change is enacted. This is an exception to the general rule in ASC 740-10-30-17 under which entities should consider all currently available information about future events when determining whether a valuation allowance is needed for DTAs.

See paragraphs 4.121 through 4.124 of Deloitte’s A Roadmap to Accounting for Income Taxes for additional discussion regarding the consideration of changes in tax laws or rates in the assessment of the realizability of DTAs.

CFC Look-Through Rule and the Active Financing Exception

Entities should have previously factored in the lapse of the look-through rule and active financing exception in measuring current and deferred taxes on earnings of foreign subsidiaries. Because of the lapse of the look-through rule and active financing exception, U.S. entities may have been required to recognize current and deferred taxes related to certain earnings of foreign subsidiaries even if the subsidiary did not or does not plan to remit earnings to the U.S. parent. As a result of the limited extension (i.e., through 2013) of these provisions, entities may need to adjust current and deferred taxes related to those earnings of foreign subsidiaries. This financial reporting impact would be recognized in the interim and annual period that includes the date of the Act’s enactment. An entity should consider the currently enacted tax law as of the balance sheet date in calculating current and deferred taxes and should not anticipate the reenactment of a tax law that is set to expire when recognizing or measuring current or deferred taxes.

Disclosure of Subsequent Events

As stated above, the effects of a change in tax law must be recognized in the interim and annual period that includes the enactment date for financial reporting purposes. Therefore, for entities that have not yet issued their financial statements for interim or annual periods that ended before the enactment date, the extenders are treated as nonrecognized subsequent events. In accordance with ASC 855, Subsequent Events, to the extent that the absence of any disclosure of the extenders and their impact would cause the financial statements to be misleading, an entity should disclose both the nature of the extenders and their estimated financial effect.² Entities should also consider disclosing in MD&A the impact of the enactment on the entity’s current or future results of operations, financial position, liquidity, and capital resources.

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1 For more information, see Deloitte’s Swerving From the Cliff: Tax Provisions in the American Taxpayer Relief Act of 2012.

2 See ASC 855-10-50-2.