Navigating the tax accounting impacts of the CARES Act.

• Author: Heroux, Mark
• Position: Coronavirus Aid, Relief, and Economic Security Act of 2020

In 2017, one of the most comprehensive pieces of tax legislation ever, the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, was enacted. In addition to companies and practitioners needing to reevaluate key aspects of tax law, much focus was needed on the financial statement impact of these legislative changes in accordance with FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes. The COVID-19 pandemic has, again, heightened the focus on tax law changes and financial statement consequences with the March 27, 2020, enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

In an attempt to create economic stimulus through the income tax regime, the CARES Act temporarily suspended or modified several elements of the TCJA (e.g., net operating loss (NOL) and interest limitation rules) and provided a key technical correction relating to qualified improvement property (QIP).This discussion highlights some of the key issues under Topic 740 that may arise in both interim and annual financial statements.

Remeasurement of deferred tax accounts

Topic 740 requires the effect of changes in income tax laws (or rates) on deferred tax assets (DTAs) and deferred tax liabilities (DTLs) to be recorded in continuing operations in the period that includes the date of enactment (i.e., March 27, 2020, in the case of the CARES Act). The impact on the income tax receivable or payable will also be recognized in the period of the enactment date even if the deferred tax balances relate to a prior period. When remeasuring the DTAs or DTLs, companies will need to consider future reversals and taxable temporary differences as of the enactment date to determine the applicable law to be used for each item. For example, due to the CARES Act, companies may have a different interest expense limitation (Sec. 163(j)) carryforward than originally recorded, or may be remeasuring tax basis in fixed assets due to the new ability to depreciate QIP over 15 years (or take 100% bonus depreciation). These potential changes will necessarily affect the DTAs or DTLs recorded.

Impacts for carryback claims

The CARES Act temporarily restored the ability to carry back NOLs originating in 2018, 2019, and 2020 to offset taxable income in the five preceding years. This creates the opportunity to recognize a current benefit for losses that would otherwise have been carried forward. If a company intends to elect out of the carryback or...