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Certain types of entities are generally exempt from income taxes. It can be challenging to determine the extent to which ASC 740 is applicable. Some common examples are set out below.

1.4.1 Limited liability companies under US tax law

Questions often arise regarding how single-member and multiple-member limited liability companies (LLCs) should account for income taxes in their separate financial statements. ASC 740 provides guidance about single-member LLCs, and ASC 272, Limited Liability Entities, provides guidance on accounting for multiple-member LLCs. See TX 14.5 for a discussion of the applicability of ASC 740 to the separate financial statements of LLCs.

1.4.2 Applying ASC 740 to general and limited partnerships

In the United States, general and limited partnerships (except certain “master limited partnerships” discussed below) are not subject to tax, because their earnings and losses are passed directly to their owners and taxed at that level. ASC 740 does not apply to such partnerships. Although many tax regimes around the world have a similar approach for partnerships, this is not always the case. In certain jurisdictions, partnerships represent taxable entities. In those cases, the provisions of ASC 740 would apply to a tax based on income for that jurisdiction even if other jurisdictions do not subject such entities to tax.
Question TX 1-1 addresses whether the Bipartisan Budget Act of 2015 impacts the application of ASC 740 to US partnerships.
Question TX 1-1
Would the potential assessment of tax by the IRS at the partnership level for an imputed underpayment mean that ASC 740 applies to a US partnership?
PwC response
No. While the Bipartisan Budget Act of 2015 resulted in significant changes to the IRS’ audits of partnerships and related adjustment procedures, ASC 740 provides that the determination of whether income taxes are attributable to the entity or its owners should be based on the laws and regulations of the taxing authority rather than on who pays the income taxes. For US federal purposes, partnerships are respected as flow-through entities that are not subject to income taxes. The partners of the partnership remain responsible for the tax consequences of the partnership and payment of any income tax obligations by the partnership is attributable to, and for the benefit of, the partners. This view is consistent with AICPA Technical Questions & Answers Section 7200.
While we believe that ASC 740 does not apply to the partnership itself, corporate partners of the partnership should continue to assess the impact of potential uncertain tax positions related to the outside basis of their partnership interests. See TX 11.7 for accounting for outside basis differences in a partnership.

1.4.3 Foreign withholding taxes levied on pass through entities

While partnerships, S-Corporations, and similar "pass through" entities may not be subject to tax in their home jurisdiction, this tax status is not always respected by the tax laws of overseas territories. Income generated in foreign jurisdictions may be subject to foreign withholding taxes. It is unclear how an entity that is otherwise a "pass through" entity for tax purposes should account for these withholding taxes. We believe, depending on the facts, there may be more than one acceptable presentation.
Because the taxes have been withheld on income, it would be acceptable to view these taxes as being within the scope of ASC 740 and record an income tax expense. Effectively the foreign jurisdiction has levied taxes on the entity despite its nontaxable status in its home territory.
Alternatively, the reporting entity could account for the taxes as a deduction from equity because the taxes have in substance been paid on behalf of the members. As a nontaxable “pass through” entity, any foreign taxes withheld are effectively being levied on the members.
Another alternative for entities operating as investment vehicles and reporting as an investment company might be to consider the withholding tax to be an “above-the-line” expense in accordance with the accounting for investment companies in ASC 946-225-45-3(h).

1.4.4 Master limited partnerships

In the US, publicly traded limited partnerships (“master limited partnerships”) are generally taxable as corporations. Certain limited partnerships, however, to the extent they generate substantially all (greater than 90%) of their income from “qualifying activities,” are exempt from tax (e.g., partnerships engaged in real estate activities or the transportation and distribution of natural resources). Assuming an entity is established to operate in an effectively tax exempt manner and continues to meet the requirements to be exempt from federal income tax, the provisions of ASC 740 would generally not apply.

1.4.5 REITS and regulated investment companies

Regulated investment companies (RICs) and real estate investment trusts (REITs) are not subject to tax if distribution requirements and other conditions are met. Although the recognition and measurement provisions of ASC 740 would not be applicable to these entities, ASC 740-10-50-16 requires nontaxable entities (including RICs and REITs) that are publicly held to disclose the fact that they are not taxed. In addition, it requires such entities to disclose the net difference between the tax bases and the reported amounts of their assets and liabilities. However, for some entities, the depreciation or depletion deductions available to individual owners will not be pro rata to ownership interests but will instead reflect the different outside tax bases of the individual owners. Further, each owner’s tax accounting (e.g., depletion calculations for mineral properties) might depend on his or her individual tax position. As a result, the reporting entity frequently will not have information about individual owners’ tax bases. We believe that if these circumstances make it impracticable for an entity to determine the aggregate tax bases of the individual owners, the reporting entity should indicate this in its financial statements.

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