Accounting for Income Taxes Flashcards
ASC 740 adopts what sort of approach in computing the GAAP income tax provision (expense)?
Balance Sheet Approach
The total income tax expense reported on the GAAP income statement is split into what two components?
- Current tax expense
- Deferred tax expense
What is current tax expense based on?
- Based on the amount of income taxes paid or payable for a year determined by applying enacted tax laws to TI for the year
What is deferred tax expense based on?
- Based on net change to deferred tax assets and liabilities based on temporary differences b/w financial and tax accounting methods that arise in the current period
The amount of future taxes payable is reflected as what?
Deferred tax liability
The amount of future taxes saved is reflected as what?
Deferred tax asset
What does ASC 740 apply to?
- Income taxes levied by federal, state & local, and foreign governments
How does ASC 740 define a temporary difference?
- Difference b/w tax and financial reporting basis of an asset or liability that will result in either (i) future taxable amounts or (ii) future deductible amounts when the reported amount of the asset is recovered or the liability is settled
How is deferred tax liability computed?
DTL = future taxable amount(s) * tax rate
When do permanent book-tax differences occur?
- When a revenue or expense item is included in only book income or TI (i.e. item does not appear in both)
Give an example of a common permanent difference.
- Interest income on state and local municipal bonds
- Disallowed (50%) meals and entertainment expenses
- Dividends received deduction
- Corporate owned life insurance premiums paid (not deductible)
- Corporate owned life insurance proceeds received (not taxed)
- Payments related to penalties or fines
- Permanently reinvested foreign earnings
- Political contributions
- Domestic production activities deduction (Sec. 199)
- Excess tax deduction on non-qualified stock options (special treatment through SE)
What will permanent book-tax differences affect?
- Affects current tax payable b/c such items affect the computation of taxable income
When do temporary book-tax differences occur?
- Occur when a revenue or expense item is reported in a different period for book income than it is for taxable income
Where do deferred tax liabilities generally appear on the Schedule M-1?
Right side
Where do deferred tax assets generally appear on the Schedule M-1?
Left Side
Give an example of a common temporary difference.
- Installment method sales for tax but not for book
- Excess tax depreciation over book depreciation
- Prepaid revenue recorded for tax but not book purposes
- Tax deferred like-kind exchanges
- Basis differences due to corporate acquisitions
- Accrued expenses
- Accrued contingency losses
- NOL and capital loss carryovers
Do timing differences affect GAAP tax expense?
No
Do permanent differences affect GAAP tax expense?
Yes
Why would a business have a deferred tax valuation allowance account?
- Created if there’s more than 50% probability that company will not realize some portion of deferred tax assets
In general, uncertain tax positions will cause what?
- A liability (liability for uncertain tax position or tax reserve)
How do you calculate effective tax rate?
GAAP tax expense divided by pre-tax GAAP income
Given a base case, how does the financial accounting change if the entire cost of the assets can be depreciated in the first year for tax purposes as opposed to over several years?
- While this change reduces the PV of taxes paid, it has no effect on income statement
- Total GAAP tax expense is still the same
- Timing of tax payments do no affect the tax expense or ETR but does change the split between current and deferred tax expense and the classification of the tax payable
What are two common journal entries when recording total tax expense?
1) Debit current tax expense; credit total tax payable
2) Debit DTE; credit DTL
or Debit DTA; credit DTE
In the accounting for income tax material, what are the seven key steps we follow?
1) Complete tax column to compute US federal tax liability
2) Use T- accounts to compute net DTA/DTL change for the year
3) Complete book column to compute total income tax expense
4) Make JEs to record total tax expense
5) Split tax expense into current and deffered portions as required in the tax footnote
6) Compute ETR
7) Reconcile tax due under statutory tax rate to tax provision amount
