Q:
"Presentation of an Unrecognized Tax Benefit When a Tax Credit Carryforward or Net Operating Loss Carryforward Exists." The settlement of a liability for an unidentified tax benefit may be reduced by a net operating loss (NOL) carryforward or a tax credit carryforward as needed by U.S. tax law. The IRS does not need a disallowed uncertain tax position to be settled in cash if enough NOL carryforwards are available to remove the additional taxable income, but a taxpayer is required to use NOL carryforwards in the first year taxable income arises.
Topic 740, Income Taxes, does not add explicit guidance on whether and when an entity could present an unrecognized tax benefit as a liability or as a reduction of NOL carryforwards or other related tax credits. In practice, the presentation of the liability for an unidentified tax benefit depends on the relationship with the NOL carryforwards. If the liability for an unrecognized tax benefit is directly related with a tax position taken in a tax year that results in or that resulted in the recognition of an NOL carryforward for that year (and the NOL carryforward has not yet been utilized), the unrecognized tax benefit could be presented as a reduction to the NOL; otherwise, it should be shown as a liability.
The issue is how an entity could present a liability for an unrecognized tax benefit in the statement of financial position when non-recognition of the tax benefit would otherwise reduce a deferred tax asset related to an NOL or tax credit carryforward under the provisions of the tax law.
Required:
- Determine the key areas being addressed by the EITF
- Assess how a company's accounting and financial reporting is likely to be impacted by the work being done by the EITF on this issue.