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Don’t Forget The SALT: Compliance With State Tax Planning Strategies

10 Jul 2011

Recent trends in state and local income tax rules have led to increasing questions about how to treat them under Financial Accounting Standard (FAS) 109 and Financial Accounting Standards Board Interpretation (FIN) 48. Taxand US looks at these trends and discusses options for handling them in light of the FAS and FIN requirements.

Generally, accounting for income taxes is governed by FAS 109 (now Accounting Standards Codification 740 - ASC-740), which uses the liability method of accounting. FIN 48 (now ASC 740-10) requires companies to analyse income tax positions (taken in a previously filed return or expected to be taken in a future return) that are less than certain.

Recent trends in state and local income tax rules may have profound impacts on the analysis of uncertain tax positions and on possible recognition of such positions which include:

  • economic nexus
  • combined/consolidated reporting
  • single sales factor
  • tax rate increases and decreases
  • net operating loss limitations
  • treatment of alternative taxes.

ASC-740-10 requires an analysis of a taxpayer's uncertain tax positions. In attempting to identify such positions, there are several areas where taxpayers are more likely to find uncertain tax positions.

Analysing states where the company is not currently filing tax returns may surface nexus requirements. Examining the company's filing options may lead to a discovery of different choices (or requirements) than those currently used. Consideration of any significant state income tax planning structures (especially given the aggressive audit postures of many states) may uncover uncertain tax positions. Recent transaction activity (may lead to changes in state income tax requirements. And, of course, an examination of significant state tax audits in process or recently resolved will almost certainly lead to the identification of uncertain tax positions.

Once identified, uncertain tax positions must be analysed to determine if the related benefits taken are more likely than not to be realised. This analysis assumes that all positions will be examined by the taxing authorities and that such authorities will have all information pertaining to the position. The likelihood that a position will actually be audited and examined is not taken into account in performing the analysis. It is also assumed that the highest level of tax authorities will examine the position.

Taxand's Take

The current climate in state and local tax presents taxpayers with many challenges, not the least of which is identifying and reporting uncertain tax positions under ASC-740 and ASC-740-10. Further, the qualitative nature of the analysis of such positions necessarily means that there may not be clear guidance as to their ultimate treatment.

Although complying with ASC-740 and ASC-740-10 is challenging, the qualitative nature of the underlying analysis and lack of clear guidance in many areas of state income tax law provides taxpayers with some flexibility in determining whether it is more likely than not that a particular position will be sustained. Of course, this requires a thorough, well-reasoned approach to examining the likely treatment of positions by taxing authorities. Finally, it is unlikely that the pace of change in state and local income tax will decrease, which will mean greater challenges for taxpayers in identifying and analysing uncertain tax positions.

Your Taxand contact for further queries is:
Brian Pedersen
T. +1 206 664 8911

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Taxand's Take Author