Cash Flow Implications of Tax Credits in Loss Companies

Accounting for the tax impact of losses is a complex subject that can have significant implications for cash flow and for the creditworthiness of the loss company. It is not easy to isolate the cash flow effects of losses and the associated tax credits. A synthesis of the relevant, generally accepted accounting principles (GAAP) and tax laws is presented to help establish the analytical framework to deal with the interaction between tax accounting standards (tax GAAP) and the income tax regulations (tax law). Case examples are used to illustrate the reporting standards and highlight their cash flow implications. The cases cover the range of circumstances typically handled by the tax analyst, including cases in which a full tax credit at amounts approximately equal to the statutory rate have been taken, cases in which only partial credits have been taken, and cases of zero tax credits. From the analyst's view, these 3 categories cover the spectrum from strong to weak.