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SSAP No. 101 update and Q&A observations: Tax-planning strategies

Continued from SSAP No. 101 update and Q&A observations: Admissibility calculation

Tax-planning strategies

Future realization of the tax benefits of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periods available under the tax law. There are four possible sources of taxable income available to realize a tax benefit for deductible temporary differences and carryforwards:

  • Future reversals of existing taxable temporary differences
  • Future taxable income exclusive of reversing temporary differences and carryforwards
  • Taxable income in prior carryback year(s) if carryback is permitted under the tax law
  • Tax-planning strategies

A reporting entity shall consider tax-planning strategies in determining the amount of the statutory valuation allowance adjustment necessary and the realization of deferred tax assets when determining admissibility. Additionally, any significant potential expenses to implement a tax-planning strategy or any significant losses that would be recognized if that strategy were implemented shall reduce the amount of admission under the admissibility calculation.

Q&A observations

When a prudent and feasible tax-planning strategy is considered that is more-likely-than-not to enable realization of all or part of an adjusted gross deferred tax asset or admitted deferred tax asset, a reporting entity must evaluate the likelihood of whether a tax loss contingency would be required to be reported. If so, the admitted tax benefit of a tax-planning strategy must be reduced by the amount of the required tax loss contingency.

Tax loss contingency related to tax-planning strategy

A tax-planning strategy provides for a $100 admitted deferred tax asset. However, the reporting entity estimates a tax loss contingency reserve of $40 that would be required if the tax-planning strategy was implemented. The admitted deferred tax asset resulting from the tax-planning strategy would be reduced by $40, resulting in a $60 admitted deferred tax asset. 

 

Because the admitted deferred tax asset is net of any applicable tax loss contingencies, no separate tax loss contingency would actually be recorded for these items.

Unlike the determination of the statutory valuation allowance, under which the reporting entity is required to consider the impact of tax-planning strategies to determine the amount of the adjustment if a conclusion is reached that a statutory valuation allowance adjustment is necessary, a reporting entity is not required to use tax-planning strategies in determining the portion of its adjusted gross deferred tax assets that are admissible.

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SSAP No. 101 update and Q&A observations: Admissibility calculation