1. Corporate tax rates
The cut in corporate taxes from a top rate of 35% to a flat 21% is reflected in deferred taxes for December 31, 2017. Deferred tax assets, liabilities and related valuation allowances will decrease. All impacts of revised rates run through current period income tax expense. Changes in income tax rates on foreign income should be reassessed. Fiscal year filers with tax years that straddle December 31, 2017 must compute taxes using the applicable rates for the year, so some portions may be subject to the former corporate tax rates. Accounting for business combinations that took place prior to the law change will not be affected.
2. Transition tax
The U.S. switches to a territorial tax system in 2018, and foreign earnings that previously had income tax deferred are subject to a one-time transition tax of 15.5% or 8%, depending on the nature of the foreign assets held. The tax is computed as the higher of the amount due based on foreign holdings as of November 2, 2017 or December 31, 2017 and may be paid over a period of up to eight years with initial payments due when 2017 tax returns are filed. Income tax payable should be established when the law takes effect for the amount of transition tax and be allocated between current and noncurrent portions. Interest expense may be required to be imputed. Deferred taxes related to outside basis differences in foreign investments may need to be recognized.
3. AMT repeal
Corporate alternative minimum tax (AMT) is repealed. AMT tax credits related to the 2017 tax year and earlier periods are refundable up to 50% of credits that exceed regular tax for tax years from 2018 through 2020 and 100% for years beginning in 2021. Refundable AMT credits should be assessed for reclassification to current or long-term receivable.
4. Bonus depreciation
Immediate expensing (bonus depreciation) for 100% of the cost of certain qualified property acquired after September 27, 2017 is permitted. Assets eligible for bonus depreciation in the 2017 taxable year should be taken into consideration when computing current income taxes and deferred income taxes.
5. Valuation allowances
The ability to realize net operating loss (NOLs) and foreign tax credit carryforwards will need to be reassessed for changes, including the ability to offset against the transition tax, interest deductibility limitations in future periods and changes in deductible expenses.