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FASB Interpretation No. 48 (FIN 48) compliance becomes mandatory for private companies for fiscal years beginning after December 15, 2008. Companies that do not adhere to FIN 48 will need a GAAP exception in their financial statements. FIN 48 requires companies to establish reserves for uncertain income tax positions. The Journal of New England Technology wrote an article describing FIN 48’s impact on private company tax reporting. The article lists items that private companies must disclose in their financial statements and exposure areas to consider when taking aggressive tax positions.
Generally speaking, most pass-through entities do not have income tax exposure as the income passes through to the shareholders. However, we have seen that most of our clients’ pass-through entities are still being affected by FIN 48. Documentation needs to be provided to substantiate that there are no uncertain tax positions. Some positions that need to be considered are multi state nexus, exposure due to acquisition transactions and built in gains tax for S elections after a company had been a C corporation. We are seeing these issues with our clients that have previously taken aggressive positions by not filing state tax returns or documenting fair market values in the year an S election was made.
Impact of FIN 48 on Nonprofit Organizations in 2009
Beginning in 2009 all exempt organizations became subject to FIN 48. In applying FIN 48 to an exempt organization, the tax position in question could be the organization’s tax exempt status itself. As the exemption is a tax position, there should be documentation that establishes the level of certainty of that position. The organization’s Form 1023 or 1024, Application for Exemption, could confirm that the current activities of the organization are actually those which were stated in their application. Other potential uncertain tax positions for exempt organizations could be unrelated business taxable income, alternative investments, and taxable subsidiaries. FIN 48 is intended to promote transparency and must be adopted with the new Form 990, which was revised by the IRS to also promote greater transparency.
Do you have issues regarding FIN 48?
Have you taken uncertain tax positions such as not filing in states in which you have physical presence?