ASC 740 and the income tax provision

ASC 740 requires companies to record current and deferred income taxes and to disclose the components. A biotech with no taxable income still has deferred tax assets: net operating losses, research credits, capitalized Section 174 costs, stock compensation, and accruals deductible in later years. Because realization is uncertain, those assets are offset by a full valuation allowance, so the net balance sheet effect is zero and the effective tax rate is near zero.

The provision is nonetheless a real deliverable. The footnote reconciles the statutory rate to the effective rate, lists the deferred tax assets and the allowance, discloses NOL and credit carryforwards with expiration and Section 382 limits, and addresses uncertain tax positions. State taxes, foreign subsidiaries, and payroll credit elections all need to be reflected.

Auditors expect a provision prepared or reviewed by a tax specialist, and a tax footnote that ties to the returns. Companies that reach profitability, or that expect an acquisition, will find the quality of this work matters far more than its size suggests.