Uncertain Tax Position, Disclosure. Assume that Kenne Diagnostics, Inc. makes an $ 800,000 capital investment and elects an immediate expense deduction for tax purposes. Management designated this treatment to be an uncertain tax position. The uncertainty of this tax position is whether the capital expenditure qualifies as eligible property for an immediate deduction. The equipment is capitalized for financial reporting purposes and is depreciated over a 10- year useful life using the straight- line basis with no residual value, resulting in depreciation expense of $ 80,000 per year.
Based on an analysis of prior tax cases, the most likely sustainable position would be to use MACRS depreciation for five- year property resulting in a first- year depreciation expense of $ 160,000 ( i. e., 20% × $ 800,000). The entity reports $ 1,960,000 of income before tax and depreciation (or taking any Section 179 deductions) and is subject to a 40% tax rate. Managements’ analysis of the likelihood of sustainability of this deduction under examination by the taxing authorities is presented on the next page.
“As Filed” Amount of the Tax% Likelihood That the Tax
Benefit That Management Position Will Be
Expects to Sustain Sustained at This Level
$ 800,000 …………………………………….5%
$ 340,000 …………………………………….30%
$ 160,000 …………………………………….20%
$ 110,000 …………………………………….45%
Required
a. Prepare the journal entry to record the tax provision for the current year.
b. Kenne’s unrecognized tax benefits at the beginning of the year amounted to $ 120,000. Of this amount, $ 44,500 was settled during the year. Based on this information, prepare the roll forward reconciliation for Kenne’s unrecognized tax benefits.