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Tax toolkit: Navigating divestitures effectively · PwC's accounting podcast

• 0:00
  SPEAKER_03: Thought Leadership from PWC.
• 0:10
  SPEAKER_02: Welcome to PWC's Accounting Podcast.
• 0:13
  SPEAKER_02: I'm Heather Horn.
• 0:15
  SPEAKER_02: Thanks for tuning in to our Toolkit series where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:28
  SPEAKER_02: Today, we're continuing our focus on income taxes.
• 0:32
  SPEAKER_02: You'll recall from our Deals Outlook episode back in February that recent years have seen record-breaking MA activity.
• 0:39
  SPEAKER_02: So this next income tax topic is one that may be particularly relevant to a lot of our listeners, divestitures.
• 0:48
  SPEAKER_02: And even if you're not planning a divestiture now, stay tuned because there's some things you need to know even before you get to the Held for Sales stage.
• 1:03
  SPEAKER_00: I think it's important for management to understand that when they start thinking about the selling of business, that can have some tax accounting implications even before the pre-tax accounting implications.
• 1:16
  SPEAKER_02: Once again, this week, I have Jen Speng, a PwC National Office partner, and Cassie Bauman, a PwC National Office Managing Director, joining me.
• 1:26
  SPEAKER_02: They are going to take us through the considerations at play from the moment you start talking about a divestiture through assessing Hell for Sale until the divestiture is actually completed.
• 1:37
  SPEAKER_02: There's a lot to cover, so let's get started.
• 1:48
  SPEAKER_02: Cassie, Jen, welcome back.
• 1:50
  SPEAKER_02: Looking forward to our conversation today that's a little bit different than our other episodes in this tax toolkit because all the other ones focus on sort of a tax accounting concept.
• 2:01
  SPEAKER_02: But today we're actually going to talk about a type of transaction and one that I would not have immediately guessed, which is divestatures.
• 2:09
  SPEAKER_02: And I think Cassie, if anything, people would think of acquisitions as being where there would be more tax issues.
• 2:15
  SPEAKER_02: But Cassie, maybe just go to you.
• 2:17
  SPEAKER_02: Why have this topic?
• 2:20
  SPEAKER_02: Why is it important?
• 2:21
  SPEAKER_00: We thought about it for a few reasons.
• 2:24
  SPEAKER_00: I think the first is, you know, MA activity is always seemingly a hot topic.
• 2:30
  SPEAKER_00: And although when you hear MA, you think of the acquisition side on the other side of that as somebody who's divesting of a business.
• 2:37
  SPEAKER_00: And so that makes it kind of a perpetually hot topic.
• 2:42
  SPEAKER_00: The second thing is that when you think about the pre-tax accounting, there isn't often much that you do before the divestiture happens.
• 2:52
  SPEAKER_00: You might have to think about held for sale accounting if you qualify for held for sale accounting.
• 2:58
  SPEAKER_00: But beyond that, often most of the accounting takes place at the actual divestiture date.
• 3:03
  SPEAKER_00: But that's not the case for tax accounting.
• 3:06
  SPEAKER_00: There can actually be some tax accounting implications before you even reach held for sale.
• 3:11
  SPEAKER_00: So that was the second reason.
• 3:13
  SPEAKER_00: And then the third thing was, you know, when you a company decides to divest of a portion of its business, there are a variety of income tax considerations, accounting considerations that can happen.
• 3:26
  SPEAKER_00: And there's not just one place in 740 where you can find that.
• 3:29
  SPEAKER_00: There's not even just one place in our tax accounting guide that you can find that.
• 3:32
  SPEAKER_00: And so we thought it would be good to kind of sit down and bring the whole picture together, since you know there are a lot of companies who are doing domesticates.
• 3:41
  SPEAKER_02: Yes.
• 3:41
  SPEAKER_02: And I think those are all good reasons.
• 3:43
  SPEAKER_02: In particular, the one that really struck me when we talked about this before is the fact that there are issues that predate held for sale, because I think for non-tax accountants, it's very structured.
• 3:54
  SPEAKER_02: You have to meet these very specific criteria or you don't do anything.
• 3:58
  SPEAKER_02: Obviously, you have impairment or otherwise in some cases, but there's really a lot that's triggered with held for sale.
• 4:04
  SPEAKER_02: But Cassie, you mentioned that there's other things you need to think about even before you reach Held for Sale.
• 4:11
  SPEAKER_02: So when is that and what are some of the items?
• 4:15
  SPEAKER_00: Yeah, so maybe let me step back and give our listeners a roadmap for our discussion today.
• 4:20
  SPEAKER_00: So when we're thinking about divestitures, there's tax accounting considerations that might come up at a couple different points.
• 4:28
  SPEAKER_00: First is when you actually start contemplating a divestiture.
• 4:33
  SPEAKER_00: The next kind of phase is you need to think about certain things when you're around the time you're reaching potentially held for sale.
• 4:43
  SPEAKER_00: And then there's additional things that you may have to think about when you actually sell the business.
• 4:49
  SPEAKER_00: So when the deal closes.
• 4:50
  SPEAKER_00: So I guess let me start at you know, before held for sale.
• 4:55
  SPEAKER_00: So this point in time when you're contemplating a divestiture.
• 4:59
  SPEAKER_00: For the most part, here, the tax accounting considerations revolve around assertions.
• 5:04
  SPEAKER_00: So within 740, ASC 740, there are certain assertions that are positive, forward-looking assertions, like the indefinite reinvestment assertion, which I think most people are familiar with.
• 5:18
  SPEAKER_00: So with that assertion, a company is asserting that they intend to reinvest the earnings of a foreign subsidiary and not repatriate them back to the parent.
• 5:29
  SPEAKER_00: And the company has to be able to say two things.
• 5:32
  SPEAKER_00: One, that they're not bringing those earnings back, but also that they actually have a plan to indefinitely reinvest those earnings.
• 5:40
  SPEAKER_00: Because really what we're thinking about here is there's an outside basis difference related to that subsidiary, and we have to be able to assert that it's not going to reverse in a taxable manner.
• 5:51
  SPEAKER_00: So those two things, you know, not bringing the earnings back and having a plan to reinvest them are required by the standard.
• 5:58
  SPEAKER_00: So you can you can see how, like, if a company starts thinking about selling a business or a foreign subsidiary, that they may no longer be able to actually assert that they plan to indefinitely reinvest those earnings.
• 6:13
  SPEAKER_02: So, Cassie, we talked about the indefinite reinvestment assertion, but are there other similar assertions that you need to be thinking about?
• 6:21
  SPEAKER_00: Yeah, there are.
• 6:22
  SPEAKER_00: So the indefinite reinvestment assertion deals with a company and investment in a foreign subsidiary.
• 6:27
  SPEAKER_00: So that's just one example, but there are others.
• 6:30
  SPEAKER_00: So there's a similar concept.
• 6:32
  SPEAKER_00: There's an exception in ASC 740 that says that relates to domestic subsidiaries that says if you expect to um effectively liquidate that investment in a tax-free manner and you're able to do that, then you wouldn't have to record a deferred tax liability related to any outside basis difference.
• 6:53
  SPEAKER_00: So if you now get to a point where you're expecting that you will not be able to liquidate that investment in a tax-free manner, you may have a deferred tax liability to record at that point in time.
• 7:08
  SPEAKER_00: Likewise, there's a similar exception for deferred tax assets.
• 7:12
  SPEAKER_00: So if you had an outside basis difference in either a foreign or domestic subsidiary that would generate a deferred tax asset, there is an exception in ASC 740 that says you don't record that DTA until you can foresee that it will reverse in the foreseeable future, which is typically like a year-ish time frame.
• 7:36
  SPEAKER_00: And so when you're thinking about disposing of a subsidiary, if you plan to divest it, you may get to a point where you would say, well, I can foresee that outside basis difference reversing in the foreseeable future.
• 7:50
  SPEAKER_00: Now at that point, you need to record the deferred tax asset.
• 7:54
  SPEAKER_00: Um, so these are all, you know, we're really thinking about exceptions in ASC 740 here that allow you to not record outside basis differences related to investments in subsidiaries in certain situations.
• 8:08
  SPEAKER_00: And when those certain situations don't exist anymore, which may happen when you're considering a divestiture, that's when you have to think about recording.
• 8:18
  SPEAKER_00: The exceptions all revolve around like intent and ability.
• 8:22
  SPEAKER_00: All of these assertions get to intent and ability.
• 8:25
  SPEAKER_00: And a planned divestiture may call into question whether you have the intent or the ability or both to meet the exception anymore.
• 8:37
  SPEAKER_02: So this is something that may be hard for people to wrap their heads around because we're used to having such specific criteria when XYZ things happen, then you change things.
• 8:46
  SPEAKER_02: So clearly a lot of judgment involved in this, and I'm sure sometimes difficult conversations.
• 8:52
  SPEAKER_02: So, Jen, just curious from your perspective, as you're thinking through this judgment, how are you sort of thinking about it?
• 8:59
  SPEAKER_02: Because I'm sure the tendency for companies is to want to wait to uh to change these assertions.
• 9:07
  SPEAKER_01: Yeah, I I think there's probably two points, Heather.
• 9:10
  SPEAKER_01: You know, the first is we're not talking about, let's say somebody just was in the coffee room and thinking about saying, hey, maybe we should think about this, right?
• 9:19
  SPEAKER_01: So while there isn't some defined place where you can or some way to define, I am planning of I'm thinking about it, but I'm planning to sell it.
• 9:29
  SPEAKER_01: I think the key aspect here is these assertions that Cassie's talking about, as she mentioned, are positive forward-looking statements.
• 9:37
  SPEAKER_01: So you have to be able to support your statement.
• 9:40
  SPEAKER_01: So if you say, I am not going to cause this to reverse, you actually have to be able to make that statement.
• 9:46
  SPEAKER_01: And if you're thinking about selling the business, you have to question whether you really can make that positive assertion any longer.
• 9:53
  SPEAKER_01: So I think I think it really has more to do with what has to be behind your intent and ability to um prevent an outside basis difference from reversing as much as anything.
• 10:08
  SPEAKER_01: So I think that that has to be the key focus there.
• 10:11
  SPEAKER_02: All right, that's helpful.
• 10:12
  SPEAKER_02: So we focus obviously a lot on these outside basis differences, but are there other assertion-like considerations that we should be talking about again, even before we hit this hold for sale?
• 10:23
  SPEAKER_01: It's interesting, Heather.
• 10:25
  SPEAKER_01: I I wouldn't necessarily call it an assertion, the same way as what Cassie's just talked through, because those were really provided in the standard and their exceptions, let's say, to the recognition model.
• 10:37
  SPEAKER_01: But there is another area I think about, and that's in the case of valuation allowance assessments, which I know is another fan favorite topic.
• 10:46
  SPEAKER_01: Um, but maybe it makes sense because we are going to talk about that a lot as you go through that timeline, Cassie mentioned, to just give a quick primer.
• 10:54
  SPEAKER_01: Um, so a valuation allowance is recorded when it's more likely than not that a deferred tax asset will not be realized.
• 11:02
  SPEAKER_01: Um, so meaning it's not going to save the company, let's say, cash taxes.
• 11:08
  SPEAKER_01: Important for this conversation is just a reminder that there are four sources of future taxable income.
• 11:13
  SPEAKER_01: There's carry back, that's just under the law, and not one that we're actually going to talk about today.
• 11:18
  SPEAKER_01: The other three we will, but that one is just it's available or it's not under the law, it's probably not gonna come up in this context.
• 11:25
  SPEAKER_01: Um, but the other three are reversals of existing deferred tax liabilities, tax planning strategies, and then just your forecast.
• 11:33
  SPEAKER_01: So that's just your forward-looking forecast.
• 11:36
  SPEAKER_01: So when you're assessing a valuation allowance, the reason we'll talk about it so much today is the standard requires that you consider all available evidence.
• 11:47
  SPEAKER_01: And so that almost goes back to your conversation as well, which is why we can get into another pre-held for sale debate on valuation allowance.
• 11:58
  SPEAKER_01: Different part of the standard, but still this concept of all available evidence.
• 12:02
  SPEAKER_01: So that's maybe just a quick primer.
• 12:04
  SPEAKER_01: With that, Heather, as the primer, um, you might see where I'm going, but where I'd say in that pre-held for sale, we might be revisiting our tax planning strategies.
• 12:15
  SPEAKER_01: So digging just a little bit deeper, a tax planning strategy is an action a company wouldn't take, or sorry, wouldn't normally take, but they might take in order to avoid the expiration of some kind of a carry forward, let's say an NOL or some other kind of credit.
• 12:33
  SPEAKER_01: And so when you're thinking about that all available evidence and the tax planning source, um, it may be that a company finds a prudent and feasible tax planning strategy that they've been relying on that potentially, once you think about or decide to sell a company, may no longer be available.
• 12:54
  SPEAKER_01: So let me give you an example.
• 12:56
  SPEAKER_01: Um, let's just imagine you've got two companies in the group in the same jurisdiction, they're filing separate returns.
• 13:04
  SPEAKER_01: One has income, one has losses.
• 13:06
  SPEAKER_01: Um for whatever reason, they're filing separate returns, but they do have the option to file a consolidated return.
• 13:14
  SPEAKER_01: And let's presume in this fact pattern, the company, the entity with the losses is the parent.
• 13:20
  SPEAKER_01: And what they've said is prior to the expiration of my carry forward, I am going to consolidate.
• 13:28
  SPEAKER_01: I'm gonna elect to file a consolidation, a consolidated return.
• 13:32
  SPEAKER_01: Sorry.
• 13:33
  SPEAKER_01: Say that three times.
• 13:35
  SPEAKER_01: So the parent um says that they will elect to file a consolidated return.
• 13:41
  SPEAKER_01: And in that way, they will be able to utilize all of their um deferred tax assets or their carry forwards.
• 13:48
  SPEAKER_01: And let's imagine that that transaction met prudent and feasible.
• 13:52
  SPEAKER_01: They it was in their control, but it also made sense, let's say, in a bigger picture.
• 13:57
  SPEAKER_01: Now, if the parent's going to sell that subsidiary that's making money, then frankly, it won't be feasible for them to file a consolidated return because they're going to sell the company.
• 14:08
  SPEAKER_01: So this is just another area that there's no black and white, but it's certainly something you have to think about at each stage, including whether there's any impact on a pre-held for sale kind of time frame.
• 14:21
  SPEAKER_02: All right.
• 14:22
  SPEAKER_02: So now that we are up to, let's say, held for sale or getting closer to held for sale, Cassie, let me go back to you.
• 14:29
  SPEAKER_02: What would you start to think about at this point?
• 14:32
  SPEAKER_00: Yeah, so interestingly enough, we're gonna start where Jen just left off, which is valuation allowance considerations.
• 14:39
  SPEAKER_00: So when you get to the point when you're starting to consider whether you've reached held for sale or not, there are a number of potential considerations with regard to valuation allowances that you have to think of.
• 14:52
  SPEAKER_00: But determining when you should include some of these things in your valuation allowance assessment is really judgmental.
• 15:00
  SPEAKER_00: I know that's going to be like a buzzword for today, but um, in particular, if you have not yet met the held for sale, if you're not qualifying for held for sale, it becomes even more judgmental.
• 15:12
  SPEAKER_00: So that's the reason for that is that when a disposal group meets the criteria for being classified as held for sale, that means by definition that it's probable that you will sell the business within a year.
• 15:25
  SPEAKER_00: So probable is a higher likelihood under gap than more likely than not is.
• 15:31
  SPEAKER_00: And as you know, and as Jen just mentioned, um, deferred tax assets require a valuation allowance.
• 15:37
  SPEAKER_00: If it's not more likely than not that they will be realized.
• 15:42
  SPEAKER_00: So basically, if you're kind of measuring probable and more likely than not together, probable is a higher threshold.
• 15:50
  SPEAKER_00: So if it's probable that the disposal group will be gone within a year, then it's definitely more likely than not that it will be gone within a year.
• 15:58
  SPEAKER_00: And the impact of that business being gone in the next year is something under that all available evidence concept that Jen mentioned that needs to be considered when you're assessing the impact of the Hell for Sale classification on the remaining company's deferred tax assets.
• 16:14
  SPEAKER_02: All right.
• 16:15
  SPEAKER_02: So then does that mean if you don't meet the help for sale criteria other than the items we already talked about, then you don't need to consider the impact of disposing of the business?
• 16:25
  SPEAKER_00: So it can be a harder call if you have not met Hell for Sale, if you haven't met that criteria.
• 16:32
  SPEAKER_00: And to think through it, what we typically encourage people to do is to first understand why the disposal group hasn't met the Hell for Sale criteria and then assess whatever that reason is for not meeting the criteria in the context of whether that could affect your valuation allowance conclusion at a more likely than not level.
• 16:52
  SPEAKER_00: But it's definitely facts and circumstances specific.
• 16:57
  SPEAKER_00: One of the principal concepts in performing a valuation allowance assessment is that all available evidence.
• 17:04
  SPEAKER_00: And held for sale because it's that probable level is a pretty significant piece of evidence in the context of all available evidence.
• 17:12
  SPEAKER_00: But if a sale is in the works, just because your disposal group didn't meet the held for sale criteria, that doesn't mean you just put blinders onto it.
• 17:21
  SPEAKER_00: So for example, if you didn't meet held for sale criteria because you couldn't definitively say that the deal was going to close within a year's time frame, which is the threshold under held for sale.
• 17:34
  SPEAKER_00: But you've announced to the world that you expect to divest a portion of this and you've got bids in, then they're all positive, then it might be something that indicates that you should consider the fact that you're gonna divest of this business, even though you didn't meet the held for sale criteria.
• 17:50
  SPEAKER_00: So again, it's pretty judgmental.
• 17:53
  SPEAKER_00: All right, so that's good context.
• 17:54
  SPEAKER_02: So then, Jen, let me go back to you.
• 17:56
  SPEAKER_02: So let's walk through then how this disposal of a business could impact the more likely than not conclusion for the valuation allowance, particularly in a case that it's classified as held for sale.
• 18:08
  SPEAKER_01: Yes, so like most things, probably in more than one way, but let's start with deferred tax liabilities.
• 18:15
  SPEAKER_01: So I mentioned that earlier as a source.
• 18:18
  SPEAKER_01: Um, but in order for that to be a source, it has to reverse the deferred tax liability.
• 18:24
  SPEAKER_01: We have to reverse in the right time and in the right character in order to realize those deferred tax assets.
• 18:32
  SPEAKER_01: So you care about the timing of the reversal of both deferred tax liabilities as well as those deferred tax assets you're potentially going to realize.
• 18:41
  SPEAKER_01: So if we then move to a disposal, let's use an example.
• 18:46
  SPEAKER_01: Let's use an example of, let's say, a deferred tax liability on an indefinite live intangible asset or goodwill.
• 18:55
  SPEAKER_01: Okay, so you've let's say been amortizing for tax purposes, not book purposes.
• 19:01
  SPEAKER_01: So you've had a DTL or deferred tax liability growing over time.
• 19:05
  SPEAKER_01: Now, let's imagine all in this back pattern, all of the deferred tax assets in question all have lives.
• 19:11
  SPEAKER_01: So they're all going to expire in 20 years or something.
• 19:14
  SPEAKER_01: So generally speaking, when you made your assessment, you would have not been considering that deferred tax liability as a potential source of future taxable income because it would only reverse on impairment, which you can't anticipate, or a sale, which would have to be factually true, right?
• 19:31
  SPEAKER_01: So in that case, you might have a valuation allowance.
• 19:35
  SPEAKER_01: Well, now let's talk about that disposal.
• 19:37
  SPEAKER_01: You've just, as Cassie said, you've looked at your facts and it looks like you're going to sell a company.
• 19:43
  SPEAKER_01: Maybe not tomorrow.
• 19:45
  SPEAKER_01: Maybe you haven't hit held for sale yet, or you're close, you maybe you just haven't hit it because you're not in that 12 months, but you've clearly you're out there.
• 19:53
  SPEAKER_01: Maybe you even have a contract.
• 19:54
  SPEAKER_01: Like you could have a lot of different fact patterns, but all of a sudden that deferred tax liability might become a source for those deferred tax assets.
• 20:03
  SPEAKER_01: So that's one example, Heather, where a you know a deferred tax liability might impact your overall valuation allowance assessment.
• 20:12
  SPEAKER_02: All right.
• 20:13
  SPEAKER_02: So then in this case, you really need to assess whether the plan to sell a business impacts the timing of when any deferred tax assets or liabilities related to that business are going to reverse.
• 20:25
  SPEAKER_02: So then what else should companies be thinking about as they think about this all available evidence after a held for sale classification?
• 20:32
  SPEAKER_01: Yeah, so there's a few things.
• 20:34
  SPEAKER_01: One of the big ones is future taxable income.
• 20:37
  SPEAKER_01: So meaning like your forecast.
• 20:40
  SPEAKER_01: So what is the disposal of that business?
• 20:43
  SPEAKER_01: Are you disposing of business that's been driving losses and maybe as a result you've needed a VA?
• 20:47
  SPEAKER_01: Are you disposing of a business that's actually been generating significant income and the business that's left will need evaluation allowance?
• 20:55
  SPEAKER_01: So you're looking at some of that interplay and what it is that you'll look like post-disposal, if you will.
• 21:03
  SPEAKER_01: I mentioned obviously we just talked about deferred tax liabilities, but just in general, um, are there deferred tax liabilities that are actually going with the disposal group, such that you've been relying on those as a source of future taxable income, but now they're not going to be there.
• 21:18
  SPEAKER_01: They're not going to be available to you.
• 21:21
  SPEAKER_01: You might look at definitely judgmental, but you might look at are you expecting any tax gains?
• 21:27
  SPEAKER_01: So we talked about outside basis.
• 21:29
  SPEAKER_01: Generally speaking, you need to be pretty careful about anticipating gains until the transaction, but it is something that comes up.
• 21:38
  SPEAKER_01: We've seen there be some pretty significant judgments where you need to look at that.
• 21:43
  SPEAKER_01: All of these things need to be considered when you classify that disposal group as held for sale.
• 21:52
  SPEAKER_01: So if you get there, you definitely have to be looking at those.
• 21:56
  SPEAKER_01: Maybe just one other reminder Cassie Todd.
• 22:00
  SPEAKER_01: About that foreseeable future.
• 22:01
  SPEAKER_01: If we have an outside basis difference where it's in a deferred tax asset position, meaning your tax base is higher than a book.
• 22:09
  SPEAKER_01: If you haven't already triggered foreseeable future, because that's a pretty high threshold, by the time you hit Held for Sale, you will have.
• 22:17
  SPEAKER_01: So you need to be also recording that.
• 22:20
  SPEAKER_01: And when that happens, don't forget you have to think about evaluation allowance.
• 22:24
  SPEAKER_01: So that often can be capital in nature.
• 22:26
  SPEAKER_01: So you might have some new considerations there as well.
• 22:30
  SPEAKER_02: So, Jen, you just mentioned outside basis differences.
• 22:34
  SPEAKER_02: And that brings me back to our very first part of our conversation where we were talking about assertions and in particular the reinvestment assertion.
• 22:42
  SPEAKER_02: And let's say for whatever reason you hadn't already changed that assertion, I assume you definitely need to do that now.
• 22:50
  SPEAKER_01: Yeah, if you haven't gotten there before, by the time of held for sale, it would be very difficult, if even possible, to continue to have those assertions.
• 22:59
  SPEAKER_01: You're absolutely right.
• 23:00
  SPEAKER_02: All right, very helpful.
• 23:01
  SPEAKER_02: So then Cassie, let me go back to you.
• 23:03
  SPEAKER_02: So anything else that we should be thinking about from a tax perspective when you decide to divest?
• 23:09
  SPEAKER_00: Yeah, so if you have met held for sale, there are some other things that you have to think about when you start getting into that held for sale accounting.
• 23:18
  SPEAKER_00: So as a starting point, along with figuring out which non-tax assets and liabilities should be in the carrying amount of that held for sale disposal group, you need to figure out whether deferred taxes need to be included in the carrying amount of the disposal group that's classified as held for sale.
• 23:37
  SPEAKER_00: And that determination, meaning whether those deferred tax assets and liabilities related to the items in held for sale should be in the carrying amount of the disposal group, really depends on whether the buyer will acquire any of the tax attributes and get carryover basis, or whether they'll get new tax basis in the assets or liabilities.
• 24:01
  SPEAKER_00: And the terms of the sale and the relevant tax law are really what drive that conclusion.
• 24:08
  SPEAKER_02: All right.
• 24:08
  SPEAKER_02: So then I know you just said the terms of the sale make a difference, but big picture is when would the tax attributes move to the buyer and when would they typically not?
• 24:21
  SPEAKER_00: Yeah, so if you were doing an asset sale for tax purposes, meaning it was a taxable sale, the um the new owners, the buyers, would get new tax basis in the assets and liabilities that they acquired.
• 24:37
  SPEAKER_00: That means that the seller will usually retain and recover the assets and settle the liabilities at the value recorded.
• 24:46
  SPEAKER_00: So the DTAs and DTLs will reverse in the period of sale and become deductible or taxable to the seller themselves.
• 24:55
  SPEAKER_00: So in that case, which is when you're doing an asset sale for tax purposes, the temporary differences, the deferred tax assets and liabilities would not be included in the carrying value of the disposal group because they will not be transferred to the buyer.
• 25:11
  SPEAKER_00: Now, contrast that with a stock sale for tax purposes.
• 25:15
  SPEAKER_00: So in a stock sale, the deferred tax assets associated with any book tax basis differences in the assets and liabilities that are in the disposal group would be assumed by the buyer.
• 25:28
  SPEAKER_00: And any tax attributes, things like NOLs or tax credits, would also typically go to the buyer as well.
• 25:36
  SPEAKER_00: So because of that, the deferred taxes associated with any assets and liabilities in the disposal group should also be included in the disposal group.
• 25:45
  SPEAKER_02: All right.
• 25:46
  SPEAKER_02: And then let me ask a question because you made a big point that this is an asset sale for tax purposes and a stock sale for tax purposes.
• 25:53
  SPEAKER_02: And when we're thinking about this from an accounting perspective, we also say asset sale, but then we say sale the business.
• 25:59
  SPEAKER_02: And it sounds like the criteria for those are different.
• 26:02
  SPEAKER_02: We don't need to get into detail here, but can you just confirm that is something that you need to focus on separately from a tax versus book perspective?
• 26:11
  SPEAKER_00: Yes, those are different.
• 26:12
  SPEAKER_00: So an asset sale for tax purposes just deals with it that can be like a business combination type sale.
• 26:19
  SPEAKER_00: Um you can sell a whole business, but it can be an asset sale for tax purposes because it is just a taxable sale.
• 26:26
  SPEAKER_00: It's just the asset versus stock distinction for tax purposes really gets at whether it's a taxable or non-taxable sale of a business, um, and you know, whether the tax basis is going to carry over to the new owners or whether they're going to get new basis.
• 26:43
  SPEAKER_00: It is not, it's not related to at all the distinction in gap between an asset versus a business sale.
• 26:51
  SPEAKER_02: Okay.
• 26:52
  SPEAKER_02: That I think is a very important uh clarification for the audience.
• 26:55
  SPEAKER_02: So now that we kind of know when they're included or not, and obviously that's going to going to be deal-specific.
• 27:02
  SPEAKER_02: What like what are some of the key reasons that matters?
• 27:05
  SPEAKER_00: Yeah, so interestingly, it's not about tax accounting concepts.
• 27:09
  SPEAKER_00: It's more about actually the asset held for sale accounting under other gap, and it relates to assessing that disposal group for impairment.
• 27:23
  SPEAKER_00: So it whether the deferred tax assets and liabilities are included in the disposal group or excluded from the disposal group is important to know so that you know you have the right carrying value in total for the disposal group that you're then comparing to the fair value of the disposal group for impairment purposes, which is a completely pre-tax concept.
• 27:44
  SPEAKER_02: So then, Cassie, I noticed that was all focused on deferred taxes.
• 27:48
  SPEAKER_02: How about other like taxes payable, taxes receivable, or my favorite uncertain tax positions?
• 27:54
  SPEAKER_02: How do you think about those?
• 27:56
  SPEAKER_00: So whether or not those balances are included in the disposal group generally depends on whether the legal entity identified for sale is considered the primary obligueur to the tax authority under the applicable tax law.
• 28:11
  SPEAKER_00: So, for example, if the entity that's being sold files a standalone income tax return and is therefore its own separate taxpayer, then the taxes payable would generally be included in the disposal group and would transfer to the buyer.
• 28:27
  SPEAKER_00: And the same concept would apply to uncertain tax positions.
• 28:31
  SPEAKER_02: All right, very good.
• 28:32
  SPEAKER_02: So then all of that that we just talked about is when you decide or even before you've fully decided that you're going to divest part of the business.
• 28:40
  SPEAKER_02: But then what happens after you actually divest the business?
• 28:45
  SPEAKER_02: Is there more to think about?
• 28:47
  SPEAKER_02: And Jen, I'll go back to you.
• 28:49
  SPEAKER_01: So generally, you're probably done, right?
• 28:52
  SPEAKER_01: So, but for reversal of your um your differences, recognition, you know, doing your gain-loss calculations and things, you know, just kind of reporting those final numbers.
• 29:02
  SPEAKER_01: Um, but to the extent, I suppose the caveat would be to the extent you haven't for some reason hit held for sale, then all of those discussions we've had around assertions and the like, you would have to deal with it by now.
• 29:15
  SPEAKER_01: So um, but generally speaking, you've done your heavy lifting by this point.
• 29:20
  SPEAKER_02: So, Jen, I am so not a tax person, but one thing that sticks out from our discussion of um uncertain tax positions is that if you didn't send the deferred tax assets and liabilities with um the business that you sold or the assets that you sold, then what happens to your uncertain tax positions?
• 29:40
  SPEAKER_02: Because you could still have open tax years, right?
• 29:43
  SPEAKER_02: That those relate to, related to that divested business?
• 29:46
  SPEAKER_01: No question.
• 29:47
  SPEAKER_01: And it goes back to what Cassie was saying that where you, let's say the selling business is the primary obligure on an uncertain tax position, you're absolutely right that those would stay in your group and that for years to come, as you settle those audits, they would remain with your group.
• 30:04
  SPEAKER_01: Um so in that case, you would be settling those in the normal course as you continue through your audits and things like that.
• 30:12
  SPEAKER_02: Okay, that's a very helpful clarification.
• 30:14
  SPEAKER_02: So, one other thing that often when you think about a business being sold, you think about discontinued operations.
• 30:20
  SPEAKER_02: How does that factor into all of this discussion?
• 30:24
  SPEAKER_01: Well, it clearly does.
• 30:25
  SPEAKER_01: Um so I think one important thing, you know, we've talked a lot about held for sale and how you might have to think about some things before you even hit that held for sale.
• 30:35
  SPEAKER_01: You know, importantly, when we're talking about discontinued operations, we could talk about, as you know, that happening at the sale date, um, or it could happen before.
• 30:44
  SPEAKER_01: Um, that could matter in what you're dealing with, the accounting.
• 30:48
  SPEAKER_01: But the most significant thing we deal with in discontinued ops has to do with intra-period allocation.
• 30:56
  SPEAKER_01: So that's just a fancy way.
• 30:58
  SPEAKER_01: I think we've talked about it before of how I split my total provision to its components, components being continuing operations, discontinued operations, OCI, for example.
• 31:09
  SPEAKER_01: Um, but intra-period can be kind of complicated.
• 31:14
  SPEAKER_01: So I don't want to um, you know, it it's definitely worth mentioning that you just once you're in that disc op space, you're gonna have to deal with those um interperiod allocation rules, and occasionally they are um not necessarily intuitive.
• 31:30
  SPEAKER_02: Yes, I have personally dealt with some of those, I think.
• 31:33
  SPEAKER_02: So, Cassie, if you're dealing with this, where should you start?
• 31:37
  SPEAKER_00: Yeah, so when you are presenting discontinued operations, basically what happens is both the current year financial information and prior periods would need to kind of break out continuing operations and discontinued operations separately in the income statement.
• 31:54
  SPEAKER_00: The discontinued operations are typically presented as just a single line item in the income statement, net of tax.
• 32:01
  SPEAKER_00: And the tax accounting aspect of this is figuring out how much tax you allocate to the discontinued operations.
• 32:10
  SPEAKER_00: And that typically involves some math.
• 32:13
  SPEAKER_00: So when you're dealing with current period financial information, you're really just following the normal intra-period rules that Jen just mentioned for allocating tax expense or benefit to continuing operations versus discontinued operations.
• 32:29
  SPEAKER_00: So since they're normal, although as Jen said, they're complicated, but since they're normal and there's nothing special about that, I'm not going to get into them here.
• 32:38
  SPEAKER_00: But when you're recasting prior periods that you've already reported on, the approach is a little bit different.
• 32:45
  SPEAKER_00: So at a high level, the amount of tax that's allocated to discontinued operations is just the difference between two numbers.
• 32:54
  SPEAKER_00: It's the difference between the tax that was originally allocated to continuing operations before the DO was broken out.
• 33:04
  SPEAKER_00: So the number that was originally reported in your prior financial statements.
• 33:09
  SPEAKER_00: And then you have to then subtract out the tax allocated to the restated continuing operations.
• 33:16
  SPEAKER_00: So now that you have disk ops, you've broken out them out and you have a new CO number in those recasted financials, and you have to come up with the tax expense on the new CO number.
• 33:29
  SPEAKER_00: The difference between the old CO and the new CO number is basically what gets allocated to discontinued operations.
• 33:36
  SPEAKER_02: And Cassie, I'm gonna jump in here.
• 33:38
  SPEAKER_02: CO is continuing operations, is that right?
• 33:40
  SPEAKER_02: That's correct.
• 33:41
  SPEAKER_02: Okay.
• 33:41
  SPEAKER_02: Yep.
• 33:41
  SPEAKER_02: All right, just want to make sure people understand the shorthands.
• 33:44
  SPEAKER_02: So keep going.
• 33:45
  SPEAKER_00: So I think an example here uh might be helpful.
• 33:49
  SPEAKER_00: So let's pretend before you had any discontinued operations to break out, your tax provision for last year was$100 of expense.
• 33:59
  SPEAKER_00: And now this year you get to a point, you have a business you need to break out as a discontinued operation.
• 34:06
  SPEAKER_00: You go back to recast last year's financial statements to break out that discontinued operation.
• 34:13
  SPEAKER_00: And you first have to figure out the tax provision related to what would have been continuing operations or what you're going to recast as continuing operations for last year.
• 34:25
  SPEAKER_00: So again, you started with a$100 tax provision last year that you reported.
• 34:30
  SPEAKER_00: Now you say, okay, well, if I had broken out continuing operations from discontinued operations, my continuing operations tax expense would have only been 80 in this case.
• 34:42
  SPEAKER_00: So the amount of tax that then ends up getting allocated to discontinued operations is just the difference between the original 100 that you reported and the 80 that you've now calculated on your recasted continuing operations amount.
• 34:57
  SPEAKER_00: So the$20 difference between the two is what is reported as tax expense for discontinued operations.
• 35:05
  SPEAKER_00: So something to note is that when you're recasting here, you are just doing simple math.
• 35:12
  SPEAKER_00: I say simple, it's not really always simple, but you're just doing math.
• 35:15
  SPEAKER_00: You're not rethinking things like valuation allowance conclusions, you're not thinking about outside basis differences, you're not thinking about uncertain tax positions, you're not using any kind of hindsight to look back.
• 35:27
  SPEAKER_00: It really is a mathematical equation of just taking the original tax provision number and subtracting out the new continued operations tax provision to get what you allocate to discontinued operations.
• 35:42
  SPEAKER_02: But I guess, Cassie, maybe I'm overthinking this, but you're saying you have to recalculate the tax provision for the continuing portion of the business, recognizing maybe you're not changing conclusions you reached before.
• 35:55
  SPEAKER_02: That's right.
• 35:55
  SPEAKER_02: But you are still doing a whole new calculation.
• 35:59
  SPEAKER_00: That's right.
• 35:59
  SPEAKER_00: You do end up taking, you have a new continuing operations number because it wasn't broken out before your your financial statements last year, your tax provision was based off of the continuing operations and the discontinued operations together, that$100 in my example.
• 36:15
  SPEAKER_00: Here, when you go to recast, you do have to go recalculate and say, okay, if I only had$80, or if I only had X dollars of continuing operations income, then what would my tax provision have been for that continuing operation?
• 36:32
  SPEAKER_00: So there is a little, there is a little work.
• 36:33
  SPEAKER_00: It's not like that the numbers in that formula all exist.
• 36:37
  SPEAKER_00: You have to do a little work to get to them.
• 36:39
  SPEAKER_02: Okay, so that's helpful.
• 36:42
  SPEAKER_02: Um, and I don't even think that's the part you said was complicated, although it sounds a little complicated.
• 36:48
  SPEAKER_02: So then when you talk about complicated, what were you focused on?
• 36:52
  SPEAKER_00: So um the those interperiod rules have certain exceptions where you're not following the normal interperiod rules.
• 37:02
  SPEAKER_00: So um ASC 740 lists out several things that are always allocated to continuing operations.
• 37:11
  SPEAKER_00: Something like a change in tax law, the impact of a change in tax law is always recorded in continuing operations.
• 37:18
  SPEAKER_00: Even if it might have related to something that's now sitting in discontinued operations, the standard says you have to record all changes, the impact of all changes in tax law and continuing operations.
• 37:30
  SPEAKER_00: So most of the time it's pretty easy to identify whether you have any tax expense or benefit in a particular period that relates to one of those things that has to be allocated to continuing operations under the standard.
• 37:44
  SPEAKER_00: But there can be some that are a little bit more challenging to identify.
• 37:49
  SPEAKER_00: And there can also be some where there may not be explicit guidance per se.
• 37:55
  SPEAKER_00: Um, and it might be reasonable to potentially allocate it to either continue continuing or discontinued operations depending on the circumstances.
• 38:06
  SPEAKER_00: And so uh coming up, it really goes back to what we were just talking about, Heather, when you were asking about like you have to come up with a new continuing operations provision.
• 38:17
  SPEAKER_00: You do, and that that actually can be coming up with that number can be where the complexity sometimes comes in.
• 38:26
  SPEAKER_02: All right, so with that, then Jen, I'll go back to you.
• 38:29
  SPEAKER_02: And so what are some of those items that can get complicated when you're trying to figure out how to allocate it to either continuing operations or discontinued operations?
• 38:38
  SPEAKER_01: Well, it seems like we've given a lot of airtime to outside basis differences during this, so you can see how important it is in these uh right divestiture conversations.
• 38:48
  SPEAKER_01: But that is one where you know there has been some precedent in practice to say that when you record that deferred tax liability, that the provision for recording that could go either to discontinued operations or continuing operations.
• 39:06
  SPEAKER_01: So generally, the support for discontinued operations would be that that temporary difference that we're talking about, it really came from the operations of that subsidiary that you're disposing of, right?
• 39:19
  SPEAKER_01: So then now this disposal is actually triggering it.
• 39:23
  SPEAKER_01: Um, support for continuing ops would be that the deferred tax liability you're recording is a liability that is related to the investor, right?
• 39:33
  SPEAKER_01: So the whatever the parent company is of that discontinued operation or that subsidiary that you're selling.
• 39:40
  SPEAKER_01: Um, so that's one where we've seen precedence for either.
• 39:45
  SPEAKER_01: To Cassie's point, though, the standard also provides um a list of items that are required to go to continuing ops.
• 39:53
  SPEAKER_01: So the change in tax law, change in certain valuation allowance, um, certain judgments are also required to be allocated to continuing ops.
• 40:02
  SPEAKER_01: And there's a few others.
• 40:04
  SPEAKER_01: So I think the outside basis is where you see a fair bit of that judgment.
• 40:08
  SPEAKER_02: So, Jen, I do have one more question for you on this, but maybe before I do that, just listening to you, it's a lot to think about.
• 40:16
  SPEAKER_02: And if I am dealing with this situation, where is the best place to go look where I can actually read about it?
• 40:22
  SPEAKER_02: Is it you're saying it's not directly addressed in the tax guide?
• 40:27
  SPEAKER_01: No, so there it is, it goes back to how Cassie started our discussion.
• 40:32
  SPEAKER_01: It's in several different places, right?
• 40:34
  SPEAKER_01: So you can find some content around outside basis differences because that's when you have a change in judgment.
• 40:40
  SPEAKER_01: Um, there's a section, for example, in our guide around held for sale.
• 40:44
  SPEAKER_01: Um, we have a chapter on valuation allowances.
• 40:47
  SPEAKER_01: So that also includes when you have some of these triggers or concepts.
• 40:52
  SPEAKER_01: What I think the challenge in this space is that there isn't specific guidance on disposal.
• 40:59
  SPEAKER_01: What it is is you're looking at the guidance for a valuation allowance, for example, and you have to be able to look at it and say, well, this is the historical source of future taxable income I've had.
• 41:10
  SPEAKER_01: Has something changed?
• 41:12
  SPEAKER_01: Um so I, you know, there's lots of content out there, but it is looking more at that source topic, valuation allowance or outside basis or UTPs versus going to a section that's called disposal.
• 41:27
  SPEAKER_02: All right, that's helpful.
• 41:28
  SPEAKER_02: So then let me go back to the topic we're just talking about.
• 41:31
  SPEAKER_02: Frequently we're talking public companies here, so they would be dealing with interim financial statements.
• 41:36
  SPEAKER_02: So any specific considerations when you're dealing with discontinued operations for the quarter that we should mention?
• 41:43
  SPEAKER_01: Yeah, I think in the quarter, yes.
• 41:45
  SPEAKER_01: So it's it's maybe a little more straightforward than some of the other things we've talked about.
• 41:50
  SPEAKER_01: But importantly, um, companies are required to use that annual estimated tax rate for all ordinary income.
• 41:58
  SPEAKER_01: And excluded by the standard in the definition of ordinary income are those items which are reported net of tax.
• 42:05
  SPEAKER_01: So obviously, discontinued operations is net of tax.
• 42:09
  SPEAKER_01: So what you'll do is you'll record your discontinued operations provision or benefit discreetly in the quarter versus as part of that annual effective tax rate.
• 42:19
  SPEAKER_02: All right.
• 42:19
  SPEAKER_02: I think we probably need to have a whole other podcast on interim income tax uh provisions, but I think that is enough for now.
• 42:28
  SPEAKER_02: So, Cassie and Jen, first, Cassie, I'd like to definitely say I think this is a great topic.
• 42:32
  SPEAKER_02: I'm glad you brought it up because clearly a lot more to think about than it would seem like on the surface.
• 42:38
  SPEAKER_02: But with all of that said, then what would be your one reminder for people if they're dealing with these situations?
• 42:44
  SPEAKER_02: And Cassie, start with you first.
• 42:46
  SPEAKER_00: Yeah, for me, it's the timing aspect.
• 42:48
  SPEAKER_00: So I think it's important for management to understand that when they start thinking about the selling of business, that can have some tax accounting implications even before the pre-tax accounting implications.
• 43:02
  SPEAKER_00: And so whether the whether ultimately the tax accounting happens at the actual divestiture date, um at the decision to divest, somewhere in between, like at the health for sale time frame, uh, can really vary depending on the facts and circumstances.
• 43:21
  SPEAKER_00: Um, so I would be prepared for by having like an inventory of potential implications of selling the business so that they were just there and ready to be considered.
• 43:33
  SPEAKER_01: All right, and Jen?
• 43:34
  SPEAKER_01: Mine is my favorite, which is just so important for tax and accounting professionals to be working together that across every one of these topics.
• 43:42
  SPEAKER_01: You can see there are serious business drivers for the conclusions you'll make on the tax accounting side.
• 43:49
  SPEAKER_01: So I just can't stress enough how important it is to coordinate.
• 43:52
  SPEAKER_02: All right, I do think that's one we could just put at the end of every episode and we'd be set.
• 43:57
  SPEAKER_02: Um, but it's definitely a good reminder to give again.
• 44:00
  SPEAKER_02: So both, thank you for all your insight.
• 44:03
  SPEAKER_02: I will say we are at my favorite part, and I do think that we have some good questions for you today.
• 44:09
  SPEAKER_02: Um, not necessarily saying people know the answers, but I still think good questions.
• 44:14
  SPEAKER_02: Fun trivia.
• 44:15
  SPEAKER_02: I will say, especially the first one is fun trivia.
• 44:18
  SPEAKER_02: So, what year did the US government first impose an income tax?
• 44:25
  SPEAKER_02: Oh, you asked us on a webcast.
• 44:28
  SPEAKER_02: I did.
• 44:29
  SPEAKER_02: You are right.
• 44:29
  SPEAKER_02: Good memory, Cassie.
• 44:40
  SPEAKER_01: I was gonna say 39.
• 44:42
  SPEAKER_02: All right, those are actually so that is not right, but they are both good guesses, and here's why.
• 44:48
  SPEAKER_02: Because the actual date is 1861.
• 44:51
  SPEAKER_02: So that was during a war, and you guys both also picked sort of war adjacent dates.
• 44:58
  SPEAKER_02: So I I think your logic definitely worked there.
• 45:00
  SPEAKER_02: And in case you're curious, it was a flat 3% income tax on income over$800.
• 45:06
  SPEAKER_02: So how great is that?
• 45:11
  SPEAKER_02: So, anyway, I actually do like your guesses for that one.
• 45:14
  SPEAKER_02: Now, this one is just fun.
• 45:15
  SPEAKER_02: There's no correct answer, but I I think it's funny too.
• 45:18
  SPEAKER_02: So, what percentage of your family members think you do personal income tax returns anytime you're busy with work between January and April?
• 45:27
  SPEAKER_02: Oh, 150%.
• 45:29
  SPEAKER_01: Like, can you go over a hundred?
• 45:31
  SPEAKER_01: Exactly.
• 45:32
  SPEAKER_01: Start every conversation with I don't do individual taxes.
• 45:35
  SPEAKER_01: Literally, I just don't.
• 45:37
  SPEAKER_00: I feel like they've all learned that I don't do because I don't even do our own taxes.
• 45:41
  SPEAKER_00: My husband does them.
• 45:42
  SPEAKER_00: And he's not an accountant.
• 45:44
  SPEAKER_00: So um, but uh, but they all still think I'm busy around tax season.
• 45:49
  SPEAKER_00: Like they have they haven't quite made the connection.
• 45:52
  SPEAKER_02: Yes, my family does too, and I'm not even a tax accountant.
• 45:56
  SPEAKER_02: So there you go.
• 45:57
  SPEAKER_02: So, well, anyway, Jen and Cassie, as always, such a pleasure to talk to you.
• 46:01
  SPEAKER_02: Thanks so much for joining me today.
• 46:05
  SPEAKER_02: That's our show for today.
• 46:07
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• 46:11
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• 46:20
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• 46:43
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• 46:48
  SPEAKER_02: From Thought Leadership at PWC, I'm Heather Horn.
• 46:51
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