Question

Green Corporation is required to change its method of accounting for federal income tax purposes. The change will require an adjustment to income to be made over three tax periods. Joe, the sole shareholder of Green, wants to better understand the implications of this adjustment for E&P purposes. Joe gets dividend distributions from Green every year. Explain to Joe the impact of the adjustment on E&P.

Answer 1

Whenever there is a change in method of accounting, revised financial statements are prepared. In the given case the impact of changes in method of accounting will effect 3 tax Periods. There will be a revision in the income of all the three tax periods. The differential or the revised income will be considered for computing revised tax. The differential amount of tax computed will be paid or refunded.

For instance, in year 1, the total earning of the company was $100 crores as per the old method of accounting. However, as per revised method of accounting the earning comes to $120 hundred crores, as a result, there will be a difference of $20 crores on which the tax will have to be paid. It will be an additional expense for the company. Likewise, in the year 2 if the earning as per revised method of accounting is computed lesser than the original earning then the tax on that differential amount will be refunded. Since in the given question there are 3 tax periods the calculation will be made for all the 3 years and the net amount of tax will be either paid or refunded. If the net tax is payable it will be an expense in the year of revision, otherwise an income.

The company will also have to make the calculation of revised deferred tax for all the 3 years and make an adjustment in the year of revision.

Talking about dividend paid since dividends are already paid there will be no adjustment made in this account.