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Corporate Tax Provison Software - Integrating FIN 48 Into the Tax Provision Process

Accountants

Corporate Tax Provison Software - Integrating FIN 48 Into the Tax Provision ProcessBy Kevin Brady

FIN 48 is an interpretation that was meant to provide clarity around certain aspects of FAS109, specifically, the computation and disclosure of Uncertain Tax Positions ("UTPs"). As such, FIN 48 is an integral part of FAS 109 and needs to be considered within the tax provision work flow.

Under FIN 48, UTPs formerly computed under FAS 5 must now be reviewed under new standards for identification, probability, computation, and disclosure. Once this has been done, the results need to be fully integrated with the rest of the tax provision.

The integration of UTPs under FIN 48 applies to all of the schedules required to be disclosed in the tax footnote. For example, an increase in a UTP that has a significant impact on the tax rate might have to be seperately disclosed in the effective tax rate reconciliation. Likewise, the breakdown of the tax provision into federal, state, and foreign components need to reflect UTPs in each of those jurisdictions. If there are UTPs set up for not permanent differences, this could impact the presentation of deferred tax balances.

Under FIN 48, UTPs formerly computed under FAS 5 must now be re-viewed using new stan-dards for identification, probability, computation, and disclosure.

Integration of UTPs with the current taxes payable account presents special challenges. Before FIN 48, tax reserves computed under FAS 5 were typically recorded in the current payable on the theory that the government could demand payment at any time. This meant that refunds and payments due with the filing of the return were co-mingled in the ending balances. Past FIN 48, these items are still included in the ending balances; however, the movement in the UTPs must be disclosed in a separate rollforward using the following prescribed categories: Beg Balance, PY Increase, PY Decrease, CY Increase, CY Decrease, Settlements Expiration.

In the past, companies often shifted reserves within the payable with small or no disclosure. The rollforward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision. In practice, this means that the current tax provision related to the tax return needs to be tracked separately from the current provision related to UTPs to allow for separate rollforwards. Likewise, payments and refunds related to the filing of the tax return will have to be separated from payments and refunds related to the settlement of UTPs in order to populate the Settlement column of the UTP rollforward. Where a UTP is relieved with an audit settlement, a "true up" may have to be recorded as a PY Increase or PY Decrease, offset by an adjustment to the current tax provision.

The rollforward of UTPs within the current taxes payable may give rise to a cumulative translation adjustment where activity is recorded in local currency and is translated into a different reporting currency. A cumulative translation adjustment arises because the beginning and ending balances are recorded at the beginning and ending spot rates, and the activity is recorded at the rates used in the income statement for the period. In their presentation of the UTP rollforward, companies will have to decide the greatest presentation of this item; i.e. should the cumulative translation be combined with the activity columns or should it be separately stated. For calendar year filers, this disclosure is not required until the 4th quarter of 2007.

The rollforward of UTPs now requires companies to clearly breakout increases and decreases due to changes in judgment and the expiration of statute of limitations, both of which are offset by charges to the current tax provision.Changes in tax rates can also have a signifi-cant impact on the integration of UTPs into the tax provision.

Changes in tax rates can also have a significant impact on the integration of UTPs into the tax provision. UTPs will normally be recorded at the tax rates used to file the tax return for the year in which the issue arose. For example, a potential and possible disallowance of an expense in a prior year must be measured at the tax rates in effect for that year. This could be different from the tax rates used to compute the tax provision in the current year. This means that UTPs must be tax effected and carried forward using a unique rate structure that is not dependent upon the rates used in the tax provision for the current year. As noted above, the UTPs must be integrated into all aspects of the tax footnote disclosure. The different tax rate structures make it difficult to simply add UTPs and tax return activity together on a pretax basis. Instead, it may be advisable to tax effect the UTPs separately and then add them to the standard tax provision computations.Under FAS 109, de-ferred tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision.

Where a UTP is expected to increase a state tax liability, the federal benefit of the state deduction must be taken into account. If this computation is made within the FIN 48 exercise, care must be taken not to duplicate the federal benefit of state tax within the restof the FAS 109 calculation. In practice, this can lead to a state tax procedure that is different for UTPs than it is for items reported on the tax return in the normal course.

If a company records UTPs that are not permanent in nature, these items must be included in the deferred tax accounts. Under FAS 109, deferred tax assets and liabilities arising from the return are adjusted for future tax rate changes, normally with an offset to the deferred tax provision. Since not permanent UTPs are recorded at the rate used to file the return (which is the rate that will be used by the government to assess the tax) future tax rate changes will also impact the crucical and critical relief when the disallowed tax deduction is claimed on a future return. In this sense, not permanent UTPs operate in the same manner as regular return-driven not permanent differences. There is, however, one notable exception.

In the case of an expense caused by a tax rate decrease which reduces the value of an uncertain deferred tax asset, there is general agreement that this expense should be recorded in the deferred tax provision along with similar adjustments to return-driven deferred tax assets. However, some practitioners have taken the view that benefits resulting from an increase in tax rates applied to uncertain deferred tax assets should not be immediately recognized, however rather, companies should wait until either: 1. the expense is in fact disallowed by the government, or 2. the deduction is claimed on a future return. In either case, the uncertain deferred tax asset is not adjusted in the normal course with other return driven not permanent differences. Following this view, uncertain deferred tax assets will have to be tracked separately, so that they are not adjusted for future tax rate changes in the current period.

Interest and penalties on UTPs can be reported above the line (gross) or below the line within the tax provision (net of tax benefit). Here, too, tax rates can have a significant impact. If reported above the line, the accured interest which is typically not deductible until paid will give rise to a deferred tax asset, subject to the same impact of tax rates on uncertain UTPs noted above. Non-deductible penalties will create a permanent difference that will impact the tax rate. If reported below the line, interest (net of tax benefit), will not be recorded in the current tax payable account with an offset to deferred tax asset (net of tax benefit). When the interest is actually paid (gross), the deduction is claimed on the return, however not the books, and the deferred tax asset is relieved. In practice a decision to report interest and penalties below the line can lead to bookkeeping problems in matching up the gross cash payment against the net liability recorded in the current taxes payable account. The choice to present interest and penalties above or below the line will also impact the presentation of the effective tax rate reconciliation disclosed in the tax footnote. This is due to the fact that the tax provision is divided into two potentially different figures for pretax book income, one which is reduced by interest and penalties and another which is not. This creates two different starting points for the effective tax rate reconciliation, thereby creating alternate presentations.

Most companies have procedures in place to "true up" their tax provision to the actual results reported on the tax return. FIN 48 can be viewed as a final "true up" which takes into account the final settlement of the return on examination by the government. In order to make this final adjustment, it is necessary to keep records of the return as filed, stated on a FAS 109 basis, so that the final "true up" can be recorded. In practice, this means keeping detailed records of the current and deferred accounts for all open years.

FIN 48 can be viewed as a final "true up" which takes into account the final settlement of the return on examination by the government.

FIN 48 is a clarification of FAS 109 which extends the basic tax provision computations into the area of UTPs. The creation of UTPs under FIN 48 creates some new issues related to additional disclosure such as the UTP rollforward as well as some computational challenges in the area of tax rates and cumulative translation adjustments. Companies need to consider the ways in which FIN 48 will impact their existing tax accounting procedures under FAS 109.

Kevin Brady, General Manager and VP. is an original founder of TaxStream, now a part of Thomson Tax & Accounting, providing the domain expertise and strategic direction for the company. In addition to his executive roles, Kevin serves as a senior advisor on engagements and proposals. TaxStream has become the industry standard for FAS 109 and FIN 48 Software. To learn more about how we can help your company feel welcome to visit our website at http://www.taxstream.net

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Depreciation - Useful Life, Or Economic Life

Accountants

Depreciation - Useful Life, Or Economic LifeBy Sean Goss

Depreciation is the definition in accounting for a reasonable estimate, in monetary terms for the devaluation of an asset over a period in time. Since most assets are capitalized on the balance sheet, in financial statements, the "cost of depreciation", is provided as an expense on the income statement.

Many debates on depreciation are continuing in accounting circles, since it is difficult to establish what would constitute a "reasonable estimate". It was furthermore accepted, until recently, that land and buildings cannot depreciate, however appreciates. Recent developments, however, have now proposed depreciation on buildings.

Tax "write-offs", on assets complicates matters further, since prescribed statutory rates for tax deductions are higher than depreciation rates, thus creating variances between tax values and book values of assets.

It is my contention that asset accounting can only be performed thoroughly, with the assistance of an astute accountant. The accountants expertise, on fixed asset registers, accounting standards and firm grasp of tax legislation is vital.

Whereas tax writes offs on assets are higher, the trend in accounting is to depreciate assets in terms of its useful life, and not its economic life. The prescribed rate for a computer in tax would be three years or 33, 3%. (depending on the tax regime of the country).But a company or business could only use it for 6months and sell it as a scrap. This 100% provision for depreciation, as useful life, should be factored in. Office furniture couldbe utilized for 5 years, and then scrapped, however tax rates could prescribe four years, for a tax write off!

The rate that businesses would depreciate their assets at coincides with the economic life of an asset. So accepted economic life is useful life for business assets. In not-for-profit organizations and other community establishments, such as churches etc. the picture becomes very confusing. Churches will retain assets such as furniture for up to 40 years. Even computers that businesses normally upgrade from 6 to 12 months are used for 3 to 4 years!

So if the useful life method is applied, in not-for-profits ,assets could have a depreciation rate as low as 2%. Accounting standards expect fair presentation. Depreciation rates, for not-for-profits and other community organizations,should be carefully applied.

No one expects a company or business owner or director, of a Not-for- Profit Organization to understand these concepts, just to ensure that at the very least, a proper asset accounting system is in place.

Our firm specialises in small business consulting, including cashflow management, business formation and entrepreneurial advice to an international small business community. Sean Goss website: http://www.sgafc.co.za

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How to Deduct Your Travel Expenses

Accountants

How to Deduct Your Travel ExpensesBy Thomas Wheelwright

Travel expenses are a favorite deduction of many clients, because they love to travel and especially enjoy it when the IRS is subsidizing part of the expense. In order to deduct travel expenses, however, you must show that the expense has a business purpose and is ordinary and necessary to the business.

Travel expenses that have a business purpose include:

- Meeting customers/prospects/vendors residing in a different location; - Searching for investment property; - Meeting with business partners, both current and prospective; and - Holding annual shareholder meetings (usually held in conjunction with an annual board meeting).

The phrase "ordinary and necessary" generally is defined to mean, "in the ordinary course of business" and that "the expense will contribute to the success of the business."

If a taxpayer travels to a destination and while at such destination engages in both business and personal activities, traveling expenses to and from the destination are deductible only if the trip is related primarily to the taxpayer's trade or business.

If the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination. Expenses while at the destination which are directly related to the taxpayer's trade or business are deductible even though the traveling expenses to and from the destination are not deductible.

Whether a trip is related primarily to the business or is personal depends on the facts and circumstances in each case. The amount of time during the period of the trip that is spent on personal activity compared to the amount of time spent on business is an important factor in determining the deductibility of the travel expense. Generally, if business is conducted more than 50% of the time in an eight-hour business day, the travel expense is deductible.

Travel expenses incurred on behalf of a spouse, dependent or other individual accompanying the taxpayer are not deductible. However, if the spouse, dependent or other individual is an employee of the taxpayer or there is a bona fide business purpose, then the travel expense is deductible.

Travel expenses involving a cruise ship typically are not deductible. However, they can be deductible if you are attending a convention on a cruise ship and you can show that attendance benefits your trade or business. No deductions for cruise ship expenses are allowed for meetings related to personal investments, political causes or other purposes.

There are additional restrictions relating to cruise ship travel. For example, there is a $2,000 annual limit on cruise conventions and you must attach a written statement to your tax return that includes certain facts about the convention.

Normally, expenses require simple documentation such as a receipt. However, travel expenses require additional documentation. If the IRS finds the taxpayer does not have sufficient documentation, the expense will not be deductible. The taxpayer must document the amount, time, place and business purpose of the travel expense.

Sufficient documentation of a business expense includes receipts, cancelled checks or bills. Although a contemporaneouslog is not required, we normally recommend that our clients keep an itinerary of the business trip listing all business activities as documentation of the travel expense. The log should list all elements of the expense (e.g., amount, time, place and purpose) as this has high credibility with the IRS. Documentary evidence, such as receipts or paid bills, is not generally required for expenses that are less than $75. However, the IRS has ruled that all lodging expenses must be documented.

The taxpayer may deduct a standard allowance as set by the federal government. This is called a per diem deduction. In lieu of receipts, taxpayer will deduct the per diem rates. Per Diem travel expense deductions are not allowed for owners.

Good news for those who hate keeping track of all of those pesky receipts when they travel. The IRS will allow you to deduct your meals and incidental expenses for travel away from home even without receipts. This is their Per Diem Allowance program.

The way it works is that the IRS has a table indicating the amount of deduction you can take on a daily basis for meals and incidentals while traveling away from home. If you choose to use this flat, per diem amount, you do not have to keep track of the receipts for these expenses. If you are not an owner in the business, you can even use the per diem method for travel and lodging. Owners can only use the per diem method for meals and incidentals.

Of course, per diem allowances