Uncertain tax positions for flowthrough entities: what is an income tax?

• Published in: The Tax Adviser 2011-06, Vol.42 (6), p.410
• Main Authors: Wright, Kathleen K, Small, Jack
• Format: Magazinearticle
• Language: English
• Subjects: Accounting; Flow through method; Income tax; Income tax returns; Income taxes; Laws, regulations and rules; Limited liability companies; Net income; Private companies; State court decisions; Tax returns; Taxable income; Taxation; Uncertainty
• ISSN: 0039-9957

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740, relating to accounting for uncertainty in income taxes, requires evaluation and disclosure of the risk associated with uncertain tax positions taken or expected to be taken in a tax return. It is clear that the categorization of state payments assessed on flowthrough entities as an income or gross receipts tax depends on the purpose for which the question is asked. For purposes of ASC 740 and the analysis of uncertain tax positions, the definition found in ASC 74010-20, which defines taxable income as the excess of taxable revenues over taxdeductible expenses and exemptions for the year as defined by the governmental tax authority, means that state assessments with some allowance for deductions would fall under the scope of this analysis. This means that the ASC 740 analysis must be completed for flowthrough entities publishing financial statements under GAAP and doing business in states such as California, the District of Columbia, Illinois, Kentucky, Massachusetts, Michigan, New Hampshire, Tennessee, Texas, and Wisconsin. This makes the extension of ASC 740 to flowthrough entities a much more extensive reporting requirement than most practitioners initially thought; many had considered only the very limited situations in which a flowthrough entity might be subject to a federal income tax as the scope of this new reporting requirement.