FIN 48 Delay Offers Small Cos. Breathing Room on Taxes

While private companies have longer to comply with FASB's new rule on uncertain tax positions, that doesn’t change the balance-sheet consequences.

The Financial Accounting Standards Board has decided to allow small nonpublic companies and partnerships to put off compliance with FASB’s disclosure rule on uncertain tax positions. Originally issued in June 2006, the rule, FIN 48, went into effect for public companies last December.

FASB’s decision on Wednesday postpones FIN 48 implementation for such entities as partnerships and S corporations for about a year. (An S corporation is an Internal Revenue Service designation for private companies with fewer than 500 investors.) FASB’s action has been issued as a staff position requiring a 30-day public comment period before it’s issued.

Via its vote, FASB will allow small private companies and partnerships that start their fiscal year after December 15 to file FIN 48 disclosures and book attendant tax liabilities in 2008, when they file next year’s financials. Before the board’s decision, the companies would have been forced to comply by the end of this year. “For FASB to do this, it had to be overwhelmed with questions from practitioners and companies,” says George Victor, a partner with accounting and advisory firm Holtz Rubenstein Reminick. “The deferral was not made on a whim.”

Indeed, FIN 48 has already caused a stir among public companies regarding the requirement that they disclose uncertain tax positions and record the related liabilities this year. Tax managers at those companies took issue with the idea that an accounting rule was affecting corporate tax planning and policy. They argued that, among other consequences, FIN 48 reveals proprietary tax strategies to the IRS, Congress, and competitors.

FIN 48 governs how companies should account for uncertain tax positions on their financials. The rule requires that corporations disclose how much they have kept in reserve to cover the possibility that the IRS or state tax officials might disallow certain tax treatment. Federal or state auditors, could, for instance, disallow a company’s claim for credits and deductions, exclusion of revenue from taxable income, or the decision that a merger or other transaction can be considered tax-free. Companies must record the estimated reserve as a tax liability on their balance sheets. Before FIN 48, companies kept estimates related to such reserves under wraps for fear of tipping off the IRS or their competitors about possible weaknesses in tax positions.

Although they will have a bit more time to prepare, private companies that adhere to generally accepted accounting principles will have to implement FIN 48 and face the same scrutiny and disclosure requirements as their public counterparts. And like public companies, they will now have to perform FIN 48 analyses even if their tax issues remain relatively straightforward. Thus, companies big and small will be spending time and money to test whether a tax position is “more likely than not” to be challenged by authorities and therefore deemed an uncertain position.

As a result, it’s likely that smaller companies will be “whipsawed by the nexus problem,” comments Steve Henley, a national tax practice leader at CBIZ, an accounting and financial consultancy. The nexus problem revolves around the tax principle that if a company creates a connection, or nexus, with a state or other jurisdiction, the business could be subject to the tax laws of the local authority.

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