Rethinking the Approach to Corporate Tax Reserves
Tax reserves for uncertain tax positions maintained by US companies are substantial. Over 25 Fortune 100 companies disclose such tax reserves with values exceeding $100 million. Uncertain tax positions can have a negative effect on earnings. Companies must reserve funds when the auditor is unable to get comfortable with a tax position, and this liability on the balance sheet drags earnings down. The earnings drag will continue until the IRS review period expires, during which time the company is exposed to the real possibility of an adverse view by the tax authority that can deplete the reserve for good.
With guidance from a Big Four accounting firm on the proper accounting treatment of tax insurance and its impact on financial statements, companies now have a tool that can be strategically leveraged to have a positive impact on their company’s earnings.
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Disclaimer: Companies should consult with their tax advisors with respect to the proper tax treatment of a specific transaction or situation, and with its auditors regarding accounting treatment.
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