State and Local Tax Positions and FASB Interpretation No. 48 (FIN 48)
Areas revealed in which reporting companies need to be prepared, focusing particularly on state and local income taxation and the challenges reporting companies face.
December 11, 2007
by Frederic Attermeier, et al.
The Financial Accounting Standards Board (FASB) released its Interpretation No. 48 (FIN 48) in June 2006, applicable generally to fiscal periods beginning after December 15, 2006. For publicly held entities, it meant that they were required to build FIN 48 computations into their quarterly financial statements beginning with the first quarter of 2007. Numerous commentators requested that FASB delay the implementation of FIN 48, but on January 17, 2007, Board Members unanimously refused to do so.
In evaluating the need for an accrual under SFAS No. 5, management was able to use its judgment to determine if a liability would be assessed, including the likelihood of detection. However, under FIN 48, there is a presumption that taxing authorities will review all issues and have all available facts for their analysis.
This article briefly reviews the principles of FIN 48 and highlights areas in which reporting companies need to be prepared, focusing particularly on state and local income taxation and the challenges reporting companies face in this area.
The state and local tax area is of particular concern as many companies have inadvertently taken “tax positions” that will need analysis under FIN 48, such as nexus determinations, data used for apportionment formulas, and combined reporting options. In management’s judgment, these “tax positions” may not have been detected by state taxing authorities in the past; however, under FIN 48 they are now required to analyze and prepare a reserve for these “tax positions.”
Principles of Fin 48
The announced goal of FIN 48 is to increase relevance and comparability in the financial reporting of income taxes and to provide more complete information about income tax assets and liabilities for financial statement users. Uncertainties in tax positions on non-income taxes (as well as uncertainties in non-tax liabilities) will continue to be accounted for under SFAS No. 5, “Accounting for Contingencies.”
A “tax position” is a stance taken on an income tax return, or a position expected to be taken on a future tax return, that is reflected in measuring deferred income tax assets or liabilities. For instance, it is a “tax position” not to file an income tax return in a jurisdiction because management determines that the administrative expense of doing so outweighs the probable economic value of filing or if management has inadvertently failed to file an income tax return in a particular jurisdiction. Also, the characterization of income reported on a return as taxable in a particular category, such as capital vs. ordinary or business vs. nonbusiness, is a “tax position.”
Challenges Noted to Date
FIN 48 requires every entity to reconsider all “tax positions” it has taken in every income tax jurisdiction in which it operates where the statute of limitations remains open. As an entity can no longer use its own judgment to determine whether it is likely that these “tax positions” will go undetected, many inadvertent decisions in a state income “tax position” that had not previously been considered under FAS 109 will need to be analyzed under FIN 48.
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Frederic J. Attermeier is a Senior State and Local Tax Specialist. Attermeier can be reached at 713-407-3824. Mark L. Nachbar is a Managing Director. Nachbar can be reached at 312-416-9098. Kris Weinman is a Managing Director. Weinman can be reached at 713-407-3922. The professionals of the State and Local Tax Services Team of UHY Advisors SALT, LLC offer solutions to complex, multi-state tax issues from strategic planning to compliance. They provide a holistic approach to helping companies minimize exposure and maximize savings.