4.3 - Differences Between Book & Tax Flashcards
What does NIBT and NIAT stand for?
Net income before tax
Net income after tax
Items of income or expense that are recognized in one period for book but in a different period for tax. These cause timing differences between the two incomes, but in the long run there are no differences between book and tax.
Temporary differences
Items of income or expense that are recognized for book but never recognized for tax, or vice versa. These cause differences between book and tax.
Permanent differenecs
What’s an example of a temporary difference? What’s an example of a permanent difference?
Temporary: depreciation
Permanent: municipal bond interest income
Barnette corporation recorded book income of $560,000 for year 6 which included the following:
Straight line depreciation expense: $8,000
Municipal bond interest: $4,000
Accelerated epreciation for the year per MACRS IS $12,000. In addition, royalty income of $17,000 was received in advance of being earned and appropriately not recorded. Reconcile the book income to taxable income.
560,000 book income
+17,0000 (royalty income)
- 4,000 (depreciation)
- 4,000 (muni bond interest)
= 569,000 taxable income
The IRS requires that a company reconcile book/tax differences on what schedule?
M-1 or M-3
What is the difference between schedule M-1 and M-3?
M-1: does not distinguish between temporary and permanent differences
M-3: must be used if total assets of a company exceed $10 million. Breaks items out in more detail.
In year 1, an accrual basis calendar year corporation reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What amount should the corporation’s taxable income be as reconciled on schedule M-1?
380,000 book income
- 50,000 muni bond interest income
+ 170,000 federal income tax expense
+ 2,000 muni bond interest expense
= 502,000 taxable income
