Posted: April 10th, 2016
Issue No. 13-C, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists.” The settlement of a liability for an unrecognized tax benefit may be reduced by a net operating loss (NOL) carryforward or a tax credit carryforward as required by U.S. tax law. The IRS does not require a disallowed uncertain tax position to be settled in cash if sufficient NOL carryforwards are available to eliminate 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 include explicit guidance on whether and when an entity should 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 unrecognized tax benefit depends on the relationship with the NOL carryforwards. If the liability for an unrecognized tax benefit is directly associated 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 should be presented as a reduction to the NOL; otherwise, it should be presented as a liability.
The issue is how an entity should present a liability for an unrecognized tax benefit in the statement of financial position when nonrecognition 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.
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