The American Taxpayer Relief Act of 2012 (ATRA) was signed into law on January 2, 2013. In addition to preserving lower income tax rates for most individual taxpayers and making many other income and estate tax law changes, the act extended a number of business tax breaks, in some cases retroactively to the beginning of 2012.
ATRA’s timing complicates financial reporting. Under Accounting Standards Codification (ASC) 740, Income Taxes, "the effect of a change in tax laws or rates shall be recognized at the date of enactment." So, for periods ending before the new law’s enactment date — January 2, 2013 — you should account for income taxes as if the law hadn’t been enacted. Had ATRA been signed into law two days earlier — on Dec. 31, 2012 — the financial statement impact would have been very different for the many businesses operating on a calendar year.
ATRA retroactively extended dozens of business tax incentives, including:
This credit (also commonly referred to as the "research and development" or "research and experimentation" credit) had expired at the end of 2011. ATRA retroactively extended it through the end of 2013.
Section 179 expensing
The dollar limit for small business expensing had dropped to $139,000 in 2012, with a $560,000 investment limit, and was scheduled to shrink to only $25,000 (with a $200,000 investment limit) in 2013. ATRA raised the limits to $500,000 and $2 million, respectively, for 2012 and 2013.
Controlled foreign corporation (CFC) provisions
For companies that conduct business internationally, ATRA extended two provisions that allow deferral of income associated with CFCs. One is the exception for "active financing income," used primarily by financial institutions. The other is the Subpart F "look-through" provision, which allows deferred treatment of certain payments between related CFCs. Both provisions, which had expired at the end of 2011, were extended retroactively through the end of 2013.
Energy tax credits
ATRA retroactively extended several energy-related tax credits, some of which had expired at the end of 2011, through the end of 2013.
ATRA retroactively extended a variety of other business tax breaks, including:
- The Work Opportunity and New Markets Tax Credits,
- 15-year cost recovery for qualified leasehold-improvement, restaurant and retail-improvement property, and
- Empowerment Zone tax incentives.
For many businesses, these changes will generate tax benefits they can claim on their 2012 returns. Additionally, fiscal-year businesses may have an opportunity to file amended returns to claim benefits for the 2012 portion of their fiscal years beginning in 2011.
2012 financial statements
If your company has a calendar year end, prepare your 2012 financial statements without recognizing the tax effects of ATRA’s retroactive provisions. Instead, recognize them in the first interim reporting period that includes the enactment date — in this case, the first quarter of 2013 or January 2013. In addition, in preparing your 2012 financial statements, consider the impact of expired provisions on deferred tax assets and the need for valuation allowances, without regard to ATRA’s extension of those provisions.
Even though you’re required to disregard ATRA for purposes of pre-enactment financial statement reporting, consider adding disclosures to your 2012 financial statements if the act will have a significant impact on your company’s income tax position.
2013 financial statements
Accounting for income taxes is complex, but in simple terms, at the end of each interim reporting period, a company looks forward to the end of its tax year and — based on its expected income, expenses and other tax attributes — estimates its annual effective tax rate (AETR) for the year, taking into account the projected effect of deferred tax assets and liabilities. It then uses the AETR to estimate its income tax expense on a current, year-to-date basis.
As previously discussed, any 2012 tax effects attributable to ATRA’s retroactive provisions should be recognized in 2013, during the first interim period that includes the enactment date — typically, the first quarter of 2013. Under ASC 740, these amounts should be recorded as discrete items and should not be included in the calculation of AETR for 2013.
Similarly, any effects the changes have on deferred tax assets and liabilities should be recorded in the period that includes the enactment date and should not be reflected in AETR. To the extent ATRA affects 2013 taxes, on the other hand, any changes in current or deferred taxes should be reflected in a company’s 2013 AETR.
Stay on top of taxes
If you believe that ATRA’s retroactive provisions will have significant effects on your company’s 2012 tax bill, please contact your accounting advisor to discuss how this will affect your company’s financial statements. Your advisor can help you determine whether it’s necessary to add tax-related disclosures to your year end 2012 financial statements and ensure that you report income taxes correctly on your 2013 statements.