How To Report UTPs On Your Financial Statements

Pennsylvania imposes a flat tax rate on corporations’ net income. For company owners, comprehending the tax code and keeping up with modifications to the law may be difficult. Financial reporting for uncertain tax situations (UTPs) is one area with particular concern. Here are some explanations based on some observations. If you need more help regarding UTP reporting on your financial statements, contact a CPA in Scranton, Pennsylvania.

Ways to report UTPs of your business 

• Recognition standard

UTPs must be identified, evaluated, and reported by businesses complying with U.S. Generally Accepted Accounting Principles (GAAP) using “more-likely-than-not” standards. To put it simply, tax accruals are recorded solely for uncertain positions that adhere to this criterion.

Therefore, a tax advantage is eligible only if there is a greater than 50% chance that the position would be maintained in the case that it is challenged and taken into consideration by the highest court in that specific jurisdiction. Unrecognizable benefits should be recognized as a distinct UTP duty on the balance sheet if there is less than a 50% cumulative likelihood that they are going to face an IRS challenge.

The same accounting processes apply to foreign UTPs as to U.S. positions. Foreign employment, however, could give rise to more problems.

• Audit presumption

Businesses reporting UTPs must presume that all information will be accessible to tax authorities and that returns are going to be audited. Management is then compelled to list any pertinent tax positions, such as those that:

• Eliminate particular sources of income from your taxable income.
• Declare that restructuring equity is tax-free.
• Give up on filing a tax return in a certain jurisdiction or
• Decrease or delay income recognition by accelerating expenses like amortization or depreciation.

Management should provide comprehensive tabular disclosures and include expenses like fines and accumulated interest in its estimations when reporting UTPs. Unresolved UTPs must also be reevaluated as of every date on the balance sheet. Tax benefits that have been recognized in the past may not apply now due to recent events, including developing case law, changes in tax law, or interactions with tax authorities.

• Calculate the Potential Liability

For any unclear tax situation, determine the potential tax liability. This might involve figuring out the disparity between the company’s tax treatment and the approach that tax authorities might argue for in the scenario where the position is challenged.

• Accrue for potential Liabilities.

Make a provision for the potential obligation on the financial statements if it is expected that the uncertain tax status will lead to more taxes being paid. The sum listed should represent the most realistic estimate of any possible extra taxes due.

Jay Aguila