A tax position is taxpayer’s decision regarding how to treat a line item on their tax return. The position taken may be a specific interpretation of the tax laws or regulations as they pertain to a variety of tax-related items, such as an asset classification, the recognition of income, or when to record a transaction. A tax position can yield a permanent reduction or deferral of income taxes payable.

Examples of Tax Positions

Here are several examples of tax positions:

Deductibility of business meals and entertainment. A company deducts 100% of meal expenses, even though IRS rules may only allow 50% deduction. This creates uncertainty in whether the full deduction will be accepted.
Deductibility of research & development expenses. A company fully expenses R&D costs, assuming immediate deduction. However, tax law may require capitalization and amortization over several years.
Classification of worker status. A company classifies workers as independent contractors instead of employees to avoid payroll taxes. If the IRS determines that the workers should be employees, the company may owe back taxes and penalties.
Advance payments and deferred revenue. A software company receives a $1 million payment for a 3-year subscription. It defers revenue for accounting purposes but reports the full amount as taxable income. The IRS may argue that revenue should be spread out over the contract period.
Allocation of profits across countries. A U.S. company shifts profits to a subsidiary in a low-tax country through transfer pricing. The IRS may challenge this as tax avoidance, leading to adjustments and penalties.