At face value, tax provisioning may seem like a simple task—calculate and report on the amount of income tax your business owes for the year. But in reality, tax provisioning is a complex land mine of regulatory risk for corporate tax departments that are already strapped for resources.
Let’s take a look at the main factors complicating the tax provision process.
The Challenges of Corporate Income Tax Provisioning
Changing Tax Laws
First, tax professionals must keep track of laws and regulations at the local, state, federal, and international levels. This is already a tall order. But to add to the challenge, these rules often change from year to year.
Additionally, market trends are driving companies to go global. With more global growth, tax departments must familiarize themselves with rules and regulations from an increasing number of countries.
On top of the regulatory complexity, tax departments are also dealing with an unprecedented amount of data. More and more processes are becoming digitized. And though this can help lighten the workload, it creates the issue of more intense data management challenges. As a result, the tax life cycle has expanded to fill up all 365 days of the year.
A Corporate Income Tax Provision Checklist
To meet these challenges, you and your tax department will need to be proactive. Here’s a corporate income tax provision checklist that will help you and your department conquer the tax provision process.
1. Start Planning Early
If you’re starting to think about your annual tax provision, tax planning should be the first thing on your list. Tax planning can help your company significantly shrink or defer its annual tax liability.
It takes some strategic thinking, but tax planning will help reduce your company’s effective tax rate, freeing up funds to put toward growth or other exciting initiatives. This is the time to put in the legwork to identify and understand all possible deductible expenses that your business can qualify for.
2. Assign a Tax Provision Point Person
Appoint someone to serve as the project lead or point person for your company’s tax provision process. Choose the staff member from your team in the tax department who has the most knowledge of your processes and technology.
Making a single person accountable for your company’s tax provisioning will help you keep the project on track and avoid any confusion about who’s responsible for what. But tread carefully. You don’t want to make this position a burden. It’s important to ease the workload of your point person so they don’t feel overwhelmed by their new responsibility.
And make sure you give your point person enough authority so they can call the shots without needing approval for every decision. This will help them avoid delays and make meaningful progress from week to week and month to month.
3. Get Informed
To accurately prepare your company’s tax provision, you’ll need to be intimately familiar with Topic 740 in the Accounting Standards Codification, or ASC 740, and related best practices. ASC 740 covers how companies should account for and report income taxes.
More specifically, ASC 740 covers two objectives:
- Determining “the amount of taxes payable or refundable for the current year”
- Determining “deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns”
Although the scope of ASC 740 sounds straightforward, each tax regime in the United States and across the world has its own unique characteristics. Make sure you understand the nuances of ASC 740 in regard to federal, state, local, and—if applicable—foreign taxes based on income.
4. Stay Current
The reality is that tax accounting is incredibly complex. This complexity is magnified by constantly changing laws and regulations, both in terms of the Accounting Standards Codification and at the federal, state, and local levels.
You might spend a whole year learning the intricacies of your company’s unique tax situation. However, there’s no guarantee that your tax situation will be the same next year. That’s why it’s important to stay up to date when it comes to changes in tax codes and accounting best practices.
The Financial Accounting Standards Board (FASB) is the nonprofit organization responsible for setting the accounting standards for public companies in the U.S. You can check for updates to the ASC 740 standards and get implementation advice directly from the FASB.
5. Get Executive Management on Your Side
Change is never easy. If you’re implementing new systems or technologies to improve your company’s tax provision process, you may experience pushback from people in your department who are comfortable with the old way of doing things.
That’s why it’s important to get executive management on your side first. Inform your CFO and other members of senior management about any changes you’re trying to make early on.
Keep your CFO in the loop during the entire process—from the planning stages all the way through implementation. The endorsement of senior leadership will represent a vote of confidence for your new tax provision process and help motivate your team to get on board.
6. Automate as Much as Possible
Even under the best of circumstances, tax provisioning is a complicated and risky process. Corporate tax departments are dealing with the increasing complexity of tax laws, regulatory scrutiny on a global scale, and rigid tax reporting deadlines.
The rise in digitization also introduces the unique challenge of data management to the tax provision process. With the digital transformation, companies are faced with more data than ever before.
To help take the edge off, automate as much of your tax provision process as possible. This will help ease the overall workload for your tax department. You’ll also limit the chance for human errors by minimizing manual data entry and calculations.
For example, when working in Excel, make use of formulas wherever possible. And limit manual data input to specific tabs that can be quickly and easily scanned for accuracy.
7. Implement Software Solutions to Increase Efficiency
If you’re an Excel wizard, you might be able to design your own automated processes for tax provisioning. But most tax departments simply don’t have the programming expertise or the time and resources to master all of the ins and outs of Excel. Additionally, trying to deal with the ever-increasing amount of tax data can be overwhelming.
Many companies admit their tax model doesn’t include all of the required data. Their data exists in a piecemeal state, strewn about in different locations within the company’s systems. Gathering that data from multiple, disparate sources represents a time drain on your team. It also makes maintaining spreadsheet formulas difficult, especially on top of continual regulatory and tax law changes.
If you’re looking for a way to overhaul your tax provision process, consider implementing a tax software solution. Software solutions can help you standardize and improve the efficiency of the tax provision process. With effective tax software, you can spend less time on manual data collection, entry, and calculations, and more time on higher-value tasks such as analysis and strategic thinking.
8. Employ Thorough Training
If you’re implementing a new software solution or changing your tax provision process in any way, don’t neglect thorough training. Training ensures everyone on your team is on the same page and has the right tools to do their job well.
Customize training for your department and the needs of specific team members. For example, if you’ve appointed a point person to head your tax provision process, they will likely need a separate, more in-depth training session.
Don’t feel like you need to address everything at once. Schedule training throughout the year to avoid knowledge decay.
Choosing the most user-friendly, intuitive software solution (see No. 7 above) can help make this step go more smoothly.
Tax provisioning is a complex process. Increasing globalization, constantly changing tax laws, and intense data management demands all contribute to the challenges of tax provisioning. But with our corporate income tax provision checklist, you can streamline your company’s income tax preparation.
Tax software is an especially powerful tool. Software helps you increase the efficiency of your tax provisioning, allowing your tax department to focus on high-level strategic analysis instead of data management.
At Longview, we’ve been helping tax and finance teams solve complex data challenges for more than 25 years. Longview Tax is a comprehensive platform that provides automation capabilities to significantly reduce the time and effort needed to gather data, compute outcomes, and generate tax reporting.