FIN 48 Applicability for Pass-Through Entities
Posted 12-10-2010 | By Brian Sweeney | Download Article
Pass-through entities witnessed two years of delays in the effective date for FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48, ASC topic 740). The wait is over. FIN 48, an interpretation of FASB 109 Accounting for Income Taxes, is effective for pass-through entities beginning January 1, 2009. Determining the impact this has on pass-through entities can only be judged on a case-by-case basis.
FIN 48 specifically states that the requirements of this interpretation apply to not-for-profit organizations and pass-through entities (S-corporations, LLC, etc). This is where the provisions of this standard and specifically the application to pass-through entities become difficult. Technically, pass-through entities do not pay taxes. The tax liabilities of these entities are passed through to the shareholders. The financial statements of these entities typically do not have a provision or benefit for income taxes and have not been required to apply the provisions of FASB 109. However, there are several tax positions taken by S-corporations that result in taxable income and/or an income tax liability. Below are examples of scenarios that may result in corporate level tax:
1) Was the S-corporation election properly made?
2) Are all shareholders of the S-corporation eligible to hold S-corporation stock?
3) Have any transactions created a second class of stock?
4) Are there built-in gains?
5) Is there excessive net passive income?
6) Is there a state tax liability at the S-corporation level?
The term tax position as used in FIN 48 refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise payable in future years, or a change in the expected realizability of deferred tax assets. Tax positions encompass, but are not limited to the following:
1) A decision not to file a tax return.
2) An allocation or a shift of income between jurisdictions.
3) The characterization of income or a decision to exclude reporting taxable income in a tax return.
4) A decision to classify a transaction, entity or other position in a tax return as tax exempt.
Tax positions taken by pass-through entities should be considered in relation to the impact that position will have on current or deferred tax assets or liabilities recorded in the financial statements, not on the amount of taxable income that is passed through to the entity's shareholders. For example, if an S-corporation has taken an aggressive approach to meals and entertainment expenses and management of the entity is confident that under examination some of the meals and entertainment expenses would be deemed to be non-deductible, this would be a change in the amount of taxable income passed through to the shareholders, but would not impact the assets or liabilities of the entity.
For guidance in assessing the impact of FIN 48 on your pass-through entity or determining next steps, please contact Brian Sweeney, CPA, at bsweeney@hlbtr.com or 651-407-5856.