State provisions are complex and raise plenty of challenges. States have numerous issues and adjustments from the federal tax return. For example, some decouple and revalue fixed assets for things such as bonus depreciation or Section 179 expense. Some states have used a hybrid income base, such as Texas and Michigan. More and more states are using economic nexus rules, and revenue sourcing for apportionment is nuanced and differs among states. With issues such as these, plus the added complexity of unitary and/or consolidated filing requirements, what is needed for the tax provision calculation?
Well, technically ASC740 requires that provisions are calculated on a jurisdictional basis. This means that each state is its own separate jurisdiction, and a separate calculation including deferred items should be performed. You might say, “Yeah, well that is just too much work for such an immaterial amount.” “We just use a blended state rate.”
A blended state rate approach is used by many organizations in the tax provision computation. While this may be efficient for the tax provision process, it has risks associated with it that the provision is not accurate or complete, and variations from a more detailed computation must be tracked, quantified, and understood to avoid material misstatements of the financial statements.
One solution is to consider how tax provision software can handle more detailed state provision computations efficiently. Furthermore, for ONESOURCE Tax Provision and Income Tax compliance users, there is now an opportunity to use the new Estimated Payments software that prepares estimated tax calculations and vouchers using the information already included in your tax software.
The following are some of the benefits of state-by-state provisioning:
– Accurate tracking of generation and utilization of state specific Net Operating Losses and Credits
– Application of differing net operating loss limitations between state jurisdictions
– Proper analysis of DTA valuation allowance requirements at the state taxing authority level
– More detailed matching of state return liabilities with state provisions for return to provision work paper analysis
– Reduction of return to provision true-up amounts due to increased accuracy of current tax provision computations on a state by state basis
– More accurate association of state tax liabilities with entities within the group for tax allocation and journal entry purposes
– State taxable income estimates at provision time which can be leveraged into state estimated tax payment calculations and cash flow projections
With increased state provisioning computations, comes increased accuracy, but also an increased volume of state calculations to prepare and review. The software can enable efficient preparation; however, the review process can take longer. Some companies balance the need for accuracy with the volume of computations by segregating certain more material states, or states with unique factors to consider, into a category for state by state provisioning and combining the other, immaterial group of states into a blended rate computation for only these other states. Careful analyses of the facts are needed to determine when any blended rate approach will result in a materially accurate provision calculation, and this analysis should be reconsidered each reporting period as facts change.