1. Deferred Taxes

2. Speaker David LaRosa, CPA, CGMA, CCIFP
With twenty-five years of experience in public accounting, Mr. LaRosa is a licensed CPA in Pennsylvania & New Jersey who practices public accounting through Mayer Hoffman McCann P.C. (MHM), an independent CPA firm. Mr. LaRosa is a Director in the Accounting group of CBIZ MHM, LLC.
Based in Plymouth Meeting, Mr. LaRosa manages accounting and audit engagements for real estate developers, construction contractors, manufacturing companies, and employee benefit plans. Mr. LaRosa has passed the AICPA International Financial Reporting Standards (IFRS) and has performed several engagements under IFRS.
In addition, Mr. LaRosa has taught many accounting topics to various Continuing Education Societies and has been a national training instructor for Mayer Hoffman McCann P.C. and is a volunteer speaker for the PICPA, teaching various topics to grade school, high school and college age students.
A graduate of Loyola University in Maryland with a Bachelor of Business Administration in Accounting, Mr. LaRosa is an active member of the Construction Financial Management Association (CFMA); Associated Builders and Contractors (ABC); American Institute of Certified Public Accountants (AICPA) and the Pennsylvania Institute of Certified Public Accountants (PICPA).
Mr. LaRosa is a recent past Treasurer and Board Member of ABC.
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3. Agenda 01 Summary of Deferred Taxes 02 Valuation allowance case study03
Questions

4. Deferred Tax Summary

5. Deferred Tax Summary
Initial Measurement – The following basic requirements are applied to the measurement of current and deferred income taxes at the date of the financial statements:
The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.
The measurement of deferred tax assets is reduced, if necessary by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

6. Deferred Tax Summary (Continued)
– Deferred taxes shall be determined separately for each tax-paying component (an individual or group of entities that are consolidated for tax purposes) in each tax jurisdiction. That determination includes the following procedures:
Identify the types and amounts of existing temporary differences and the nature and amount of each type of operating loss and tax credit carryforward and the remaining length of the carryforward period.
Measure the total deferred tax liability for taxable temporary differences using the applicable tax rate.
Measure the total deferred tax asset for deductible temporary differences and operating loss carryforwards using the applicable tax rate.
Measure the deferred tax assets for each type of tax credit carryforward.
Reduce deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. The valuation allowance shall be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized.

7. Deferred Tax Liabilities
Deferred Tax Summary (Continued) Example Deferred Tax Assets and Liabilities
Deferred Tax Assets
Bad debt reserve
Inventory reserve
Inventory – 263(a) capitalization
Accrued vacation
Stock compensation
NOLs
Tax credits
Deferred Tax Liabilities
Fixed Assets (Accelerated depreciation for tax)
Prepaid Insurance

8. Deferred Tax Summary (Continued)
Valuation Allowance
– All available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. Information about an entity’s current financial position and its results of operations for the current and preceding years ordinarily is readily available. That historical information is supplemented by all currently available information about future years. Sometimes, however, historical information may not be available (for example, start-up operations) or it may not be relevant (for example, if there has been a significant, recent change in circumstances) and special attention is required.

9. Deferred Tax Summary (Continued)
Valuation Allowance (Continued)
– Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback, carryforward period available under the tax law. The following four possible sources of taxable income may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards:
Future reversals of existing taxable 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 that would, if necessary, be implemented to, for example:
accelerate taxable amounts to utilize expiring carryforwards;
change the character of taxable or deductible amounts from ordinary income or loss to capital gain or loss; or
switch from tax-exempt to taxable investments.
Evidence available about each of those possible sources of taxable income will vary for different tax jurisdictions and, possibly, from year to year. To the extent evidence about one or more sources of taxable income is sufficient to support a conclusion that a valuation allowance is not necessary, other sources need not be considered. Consideration of each source is required, however, to determine the amount of the valuation allowance that is recognized for deferred tax assets.

10. Deferred Tax Summary (Continued)
Valuation Allowance (Continued)  
In some circumstances, there are actions (including elections for tax purposes) that:
are prudent and feasible;
an entity ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused; or
would result in realization of deferred tax assets.
This Subtopic refers to those actions as tax planning strategies. An entity shall consider tax planning strategies in determining the amount of the valuation allowance required. Significant expenses to implement a tax planning strategy or any significant losses that would be recognized if that strategy were implemented (net of any recognizable tax benefits associated with those expenses or losses) shall be included in the valuation allowance. See paragraphs through for additional guidance. Implementation of the tax planning strategy shall be primarily within the control of management but need not be within the unilateral control of management.

11. Deferred Tax Summary (Continued)
Valuation Allowance (Continued)
When a tax planning strategy is contemplated as a source of future taxable income to support the realizability of a deferred tax asset, the recognition and measurement requirements for tax positions in paragraphs through 25-7, , and , shall be applied in determining the amount of available future taxable income.
Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Other examples of negative evidence include, but are not limited to, the following:
a history of operating loss or tax credit carryforwards expiring unused;
losses expected in early future years (by a presently profitable entity);
unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years; and
a carryback, carryforward period that is so brief it would limit realization of tax benefits if a significant deductible temporary difference is expected to reverse in a single year or the entity operates in a traditionally cyclical business.

12. Deferred Tax Summary (Continued)
Valuation Allowance (Continued)
Examples (not prerequisites) of positive evidence that might support a conclusion that a valuation allowance is not needed when there is negative evidence included, but are not limited to, the following:
existing contracts or firm sales backlog that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures;
an excess of appreciated asset value over the tax basis of the entity’s net assets in an amount sufficient to realize the deferred tax asset; or
a strong earnings history, exclusive of the loss that created the future deductible amount (tax loss carryforward or deductible amount (tax loss carryforward or deductible temporary difference) coupled with evidence indicating the loss (for example, an unusual or infrequent item) is an aberration rather than a continuing condition.

13. Deferred Tax Summary (Continued)
Valuation Allowance (Continued)
An entity shall use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence shall be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary, and the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion or all of the deferred tax asset. A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.
Future realization of a tax benefit sometimes will be expected for a portion but not all of a deferred tax asset, and the dividing line between the two portions may be unclear. In those circumstances, application of judgment, based on a careful assessment of all available evidence, is required to determine the portion of a deferred tax asset for which it is “more likely than not” a tax benefit will not be realized.

14. Valuation Allowance Case Study

15. Valuation Allowance Case Study
XYZ Company
Year Ended December 31,
Numbers in Millions
Projection
Pre-Audit
2018
2017
2016
2015
2014
Sales
60.0
53.0
46.0
49.0
47.0
COGS
26.0
27.0
22.0
23.0
Gross profit
34.0
24.0
Operating expense
21.0
22.5
23.5
Operating income
10.0
5.0
2.0
3.5
0.5
Interest expense
4.0
3.0
Net income (loss)
6.0
1.5
(1.0)
(3.0)
Deferred tax assets
Fixed assets
1.2
1.7
1.3
Reserves\accruals
1.5
1.8
1.4
NOLs
10.3
18.0
20.0
21.0
Tax credits
3.7
3.5
4.0
4.1
Gross deferred tax assets
16.7
25.0
26.6
27.9
Less: valuation allowances
(13.5)
(20.0)
(21.5)
(22.7)
Net deferred tax assets
3.2
5.0
5.1
5.2
Deferred tax liability
Intangible assets
(3.2)
(5.0)
(5.1)
(5.2)
Total net deferred tax assets -

16. Valuation Allowance Case Study (Continued)
Additional Information
The Company was purchased by a private equity firm in 2013 for $70 million.
Cumulative three-year tax basis income plus permanent differences of $1.6 million for the three years ended December 31, 2017.
No tax planning strategies were implemented in 2017.
Tax basis loss of $600,000 for the year ended December 31, 2016.
The Company refinanced term debt with a new bank in 2017 and a $10 million distribution was paid to the owner from the borrowings.
Owners sold their stock for $170 million in February 2018, and debt was paid off at closing.

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QUESTIONS