TEI Issues Policy Statement on Financial Statement Impact of Tax Law Changes.

• Position: Tax Executives Institute

On February 14, 2018, TEI issued a new policy statement addressing the financial statement impact ot tax law changes. This policy statement was prepared under the aegis of TEl's State and tocal Tax Committee, whose chair is Marji Gordon-Brown. Pilar Mata, tax counsel for TEI, coordinated the drafting of the policy statement. Other policy statements generated by the Committee can be accessed on the State and Local Tax Committee's page.

State and Local Tax Policy Statement Regarding Financial Statement Impact of Tax Law Changes

Tax Executives Institute encourages states adopting corporate income tax policy changes such as rate increases or the enactment of combined unitary reporting to consider the immediate impact such changes may impose on the financial statement earnings of publicly traded companies under U.S. Generally Accepted Accounting Principles (GAAP). Further, TEI requests states adopting such tax policy changes to mitigate the financial statement impact of those changes by providing a future tax deduction that would permit the immediate recognition of a deferred tax asset to allow corporations to offset the negative financial statement impact that often occurs when states adopt such policy changes.

Publicly traded companies are required to publish their financial results in accordance with GAAP. The requirements for accounting for income taxes under GAAP are contained in Accounting Standards Codification (ASC) 740. ASC 740 requires companies to report income tax expense on their book (GAAP) earnings, rather than on their taxable income. The differences between book earnings and taxable income that reverse over time are known as temporary differences. (1) Temporary differences result in differences between when income taxes are reported for GAAP purposes and when they are reported and paid under applicable tax statutes.

GAAP reporting for income taxes includes both "current income tax assets/liabilities," i.e., cash taxes currently payable to the taxing authorities, and "deferred income tax assets/liabilities," i.e., the portion of income taxes that relate to the temporary differences. Deferred income taxes relate to the timing of when the corresponding revenue and/or expenses are reflected in GAAP earnings as compared to income tax returns and must be recorded at the effective tax rate that is expected to apply, based on enacted statutes, when the temporary differences reverse in a future reporting period.

If a company's effective...