18.1 DIFFERENCES BETWEEN BOOK AND TAX INCOME (LOSS)

Question 1

WHAT ARE TEMPORARY AND PERMANENT DIFFERENCES?

Answer 1

TO DETERMINE TI A CORPORATION ACCOUNTING NET INCOME MUST BE ADJUSTED FOR INCOME AND EXPENSE ITEMS THAT ARE TREATED DIFFERENTLY FOR TAX PURPOSES. ON FORM 1120 SCHEDULE M1

TEMPORARY DIFFERENCES RESULT FROM THE SAME ITEM BEING CALCULATED DIFFERENTLY FOR ACCOUNTING THAN FOR TAX PURPOSES (THESE DIFFERENCES EVENTUALLY WORKTHEMSELVES OUT)

PERMANENT DIFFERENCES ARE INCOME OR DEDUCTION ITEMS IN THE YEAR FOR EITHER BOOK OR TAXABLE INCOME BUT NOT BOTH

1) IS THE INCOME OR EXPENSE UTILIZED TO ARRIVE AT NET INCOME?
2) IS IT SUBJECT TO TAXATION?

Question 2

HOW DO YOU RECONCILE BOOK INCOME TO TAXABLE INCOME?

Answer 2

Question 3

WHAT IS THE DIFFERENCE BETWEEN AN M1, M2, AND M3 SCHEDULE?

Answer 3

Question 4

WHAT ARE PERMANENT DIFFERENCES?

Answer 4

ANY EXPENSE INCURRED TO GENERATE NONTAXABLE INCOME IS ADDED BACK (EG INTEREST INCURRED FOR MUNICIPAL BONDS)

Question 5

WHAT ARE TEMPORARY DIFFERENCE?

Answer 5

FYI - THRESHOLD FOR CHARITABLE CONTRIBUTIONS IS LIMITED TO 10% OF TAXABLE INCOME.

BECAUSE WE DEDUCTED THE CHARITABLE CONTRIBUTION FOR BOOK PURPOSES WE ADD IT BACK TO TAKE INTO ACCOUNT THE ALLOWABLE 10% DEDUCTION.

Question 6

HOW DO YOU COMPUTE A DEFERRED TAX ASSET OR A DERFERRED TAX LIABILITY?

Answer 6

DTA RESULTS IF YOU TAX EXPENSE PER BOOK < TAX LIABILITY PER TAXABLE INCOME

DTL RESULTS IF YOU TAX LIABILITY PER TAXABLE INCOME < TAX EXPENSE PER BOOK

THE TIMMING DIFFERENCES WILL REVERSE THEMSELVES.

TO COMPUTE TAX EXPENSE PER BOOK YOU TAKE YOUR BOOK INCOME AND ADD OR SUBTRACT PERMANENT DIFFERENCES, THEN YOU MULITPLY IT BY APPLICABLE RATE (21%)

FOR THE TAX LIABILITY PER TAXABLE INCOME YOU SIMPLY TAKE THE T/I BEFORE SPECIAL DEDUCTIONS AND MULTIPLY IT BY THE APPLICABLE RATE (21%)

DEFFERED TAX ASSETS ARE NEGAITVE (DTA)
DEFFERED TAX LIABILITY ARE POSITIVE DTL

Question 7

HOW MUCH ARE YOU ALLOWED TO DEDUCT WHEN ACCRUING/ESTIMATING FOR TAX PURPOSES?

Answer 7

FOR THE BOOKS, SOME EXPENSES (WARRANT EXPENSE) ARE ESTIMATED AND ACCRUED, FOR TAXES ONLY THE ACTUAL EXPENSE INCURED AND PAID ARE DEDUCTIBLE.

THIS IS IMPORTANT IN DETERMINING TEMPORARY DIFFERENCES,

SET UP A T ACCOUNT AND NOTE THE DIFFERENCE BETWEEN WHAT WAS ACCRUED/ESTIMATED VS WHAT WAS PAID.