Chapter 19 Income Tax Accounting Flashcards
Temporary Difference
The difference between the tax basis of an asset or liability and its reported (carrying/ book) value
Taxable amounts = increase taxable income in future years
Deductible amounts = decrease taxable income in future years
must recognize currently deferred tax consequences of these differences
Tax cuts and jobs as corporate tax effect
- flat 21% Tax Rate
- re-measurement of deferred tax assets (past deductions and credits used to defray future taxes) and deferred tax liabilities (decreased) moves liability –> equity
- net operating loss cannot be carried back but can be carried forward indefinitely
- bonus depreciation (up to 100% write off) for new and used qualifying property
- limited deduction of interest expense to 30% adjusted taxable income, but can carry forward deferred tax assets
Reason income tax expense and income tax payable difference
Income tax expense - based on revenue using accrual method
Income tax payable - based on revenue using a modified cash basis (what has been collected)
Difference = deferred tax amount
Taxable income
Aka income for tax purposes
Used to determine income taxes payable using the internal revenue (tax) code
Pretax Financial Income
Financial reporting term
Income before taxes
aka income for financial reporting purposes, income for book purposes
determined according to GAAP
use to derive “income tax expense”
Deferred Tax Liabilities
Amounts that the company will have to pay the government in the future
if that rate decreases, liability shrinks
the deferred tax consequences attributable to taxable temporary differences
current year temporary difference –> future year tax increase
Components of income tax expense
Current tax expense (payable that period)
Deferred tax expense (liability)
Dr. Income Tax Expense
Cr. Income Tax Payable
Cr. Deferred Tax liability (to incur)
or
Dr. Income Tax Expense
Dr. Deferred Tax asset
Cr. Income tax payable
Deferred tax expense
An increase in deferred tax liability balance from the beginning to end of a period.
Deferred tax liability on financial statement
Noncurrent liability
(income tax payable = current liability)
Income before taxes
less income tax expense (split and show components in statement or notes)
= net income
Deferred Tax asset
Past tax deductions and credits that companies can use to defray future tax bills
if taxes go down, value decreases
deferred tax consequence attributable to deductible temporary differences
- the increase in taxes refundable/ saved in future years as a result of deductible temporary differences existing at the end of the current year
Warranty expenses and taxes
Not allowed as an expense decreasing taxable income until actually paid
creates a temporary difference
(any expense related to contingency)
Deferred tax asset value
Book basis value vs tax basis value = cumulative temporary difference * tax rate = deferred tax asset
Deferred tax benefit
Increase in deferred tax asset from beginning to end of accounting period
a negative component of income tax expense
Deferred tax asset on financial statement
Balance sheet
Noncurrent asset
Income Statement
Income before taxes
Income tax expense
Current
Deferred
Net income
Taxes on balance sheet
Income taxes payable = current liability
Income tax refund receivable = current asset
can be used to offset each other
Estimated tax payment = prepaid income taxes = current asset
Deferred tax account (temporary differences) always non-current
Presented as a net asset or liability on the balance sheet, recognized comprehensively in notes
Total income tax expense or benefit
Income taxes payable or refundable +- change in deferred income taxes = total income tax expense or benefit
Change in deferred income taxes = total deferred tax expense/ benefit
Increase in deferred tax liability = increase tax expense
increase deferred tax asset = decrease tax expense
Taxes on income statement
Income before income taxes
Provision for income taxes
net income
Include in notes:
- provision for taxes broken down between current + deferred, and also by federal, foreign,and state in each (current and deferred)
- reconciliation of income from continued operations with the amount that would result from applying domestic taxes to pre-tax income from continued operations
- reconciliation of pre-tax financial income to taxable
Tax-related note disclosures
Notes to financial statements:
- total of deferred tax liabilities
- total of deferred tax assets
- total valuation allowance (any change in valuation allowance in the period)
- types of temporary differences giving rise to significant portions of deferred tax liabilities and assets (maybe on its own scheduled?)
- predictors of future cash flow
- nature of tax loss carryforward
Uncertain tax positions
Can use “more likely than not” threshold but must do the probability under the assumption of a tax audit. so recognizing a tax liability or benefit only if it is more than 50% probable that it would be sustained on audit.
Basic principles of the asset-liability method
1) a current tax liability or asset is recognized for the estimated taxes payable/ refundable on the tax return for the current year
2) a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards
3) the measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law without attempting to anticipate future changes
4) measurement of deferred tax assets is reduced if necessary by the amount of any tax benefits that, based on available evidence, are not expected to be realized `
Valuation allowance for a deferred tax asset
A reduction to a deferred tax asset if it is (based on evidence) more likely than not that the company will not realize some / all of the deferred tax asset
- must reevaluate each accounting period
- more likely than note is > 50%
Use contra account “allowance to reduce deferred tax asset to expected realizable value” (credit natural balance)
debit income tax expense
Income tax expense on income statements
Income taxes payable/ refundable +/- change in deferred income taxes = total income tax expense/benefit
Income statement
Revenues
Expenses
Income before income taxes
Income tax expense (provision for income taxes)
Current
Deferred
Net income
Deductible temporary differences
Temporary differences between pretax financial income and taxable income that will result in deductible amounts in future years when related book liabilities are settled –> deferred tax assets
Taxable temporary differences
Temporary differences between pretax financial income and taxable income that will result in taxable amounts in future years when related assets are recovered –> deferred tax liabilities
Revenue or gains taxable AFTER recognized in financial income
Deferred tax liability for asset (AR, investment) that will result in taxable amount in future when asset s recovered
- a/r sales (tax uses cash basis accounting)
- percentage-of-completion contracts (portion of gross profits deferred for tax purposes)
- investments under equity method (tax uses cost method)
- gain on involuntary conversion of non-monetary asset: deferred for tax purposes
- unrealized holding gains (including fair value options): deferred for tax purposes
Expenses or losses deductible after recognized in financial income
Deferred tax asset resulting from a liability (contra-asset) recognized for expenses/losses that will result in deductible amounts in future when liability is settled
- product warranty liability
- estimated liabilities for discontinued operations / restructuring
- litigation accruals
- allowance method for bad debt expense (use direct method for taxes)
- stock based compensation expense
- unrealized holding loss (including fair value method); deferred for tax purposes
Revenue or gains taxable BEFORE being recognized in financial income
Deferred tax asset resulting from advance payments for goods/services to be provided in future
future sacrifices to provide those goods/services to settle liability results in deductible amounts in future years
- subscriptions paid in advance
- advance rental receipts
- prepaid contracts / advance royalties
- sales and leasebacks for financial report purposes (income deferral) reported as sales for tax purposes
Expenses or losses deductible before the are recognized in financial income
Deferred tax liability resulting from amounts received upon future recovery of the amount of an asset (whose cost has been deducted faster for accounting purposes than it was expensed for financial reporting) exceeding remaining tax basis for asset resulting in taxable amounts in the future
- depreciable property, depletable resources, intangibles
- deductible pension funding exceeding expenses
- prepaid expenses deducted on tax return in period paid
Determining temporary difference
Prepare comparative tax vs GAAP balance sheets
Reversing difference
Occurs when eliminating a difference that originated in prior periods - removing related tax effect from deferred tax account
Originating temporary difference
initial difference between the book basis and the tax basis of an asset or liability
Permanent differences
Differences between taxable income and pretax financial income that result from:
- items that enter into pretax income but never into taxable income (ex: tax free income or non-deductible expenses
- items that enter into taxable income but never into pretax financial income (ex: deductions permitted in excess of cost incurred)
Effective Tax rate
Total income tax expense / pretax financial income
Tax rate changes
company should use the enacted tax rate expected to apply for existing temporary differences
tax changes presently enacted but not yet effective
if not enacted just use current rate
Revision of future tax rate
When change in the tax rate is enacted companies should record its effect on existing deferred income tax accounts immediately as an adjustment to income tax expense in the period of the change
Income tax payable with loss carryforward deduction (no valuation allowance)
Taxable income prior to loss carryforward Less: Loss carryforward deduction = Taxable income for year * Tax rate = income taxes payable for year
Recording loss carryforward (no valuation allowance)
In year of loss:
Dr. Deferred tax asset (loss x tax rate)
Cr. Income tax expense (loss carryforward) (a contra income tax expense)
When realizing benefit:
Dr. Income tax expense
Cr. Deferred tax asset
Cr. Income taxes payable
Operating loss carryforward (no valuation allowance) on financial statements
In year of loss:
Operating income before tax ( )
Income tax benefit
Deferred
Net Loss
When benefit is realized:
Income before income taxes
Income tax expense
Current
Deferred
Net income
Net operating loss
NOL
Occurs for tax purposes in a year when tax deductible expenses exceed taxable revenues
in certain circumstances a loss from one year may be used to offset profits in other years and reduce tax burden
= carryforward of net operating losses
Loss Carryforward
A company may carry net operating loss forward indefinitely to offset future taxable income and reduce taxes payable in future years
(Indefinitely started as per tax cuts and jobs act)
realization of future tax benefits depends on future (uncertain) earnings
no different requirements than a deferred tax asset
Recording loss carryforward with valuation allowance
In year of loss:
Dr. Deferred tax asset (loss x tax rate)
Cr. income tax expense (loss carryforward)
Income tax expense (allowance)
Allowance to reduce deferred tax asset to expected realizable value
no deferred income tax benefit recognized to reduce loss that year
Recording realization of deferred tax asset with valuation account
Dr. Income Tax Expense
Cr. Deferred Tax Asset
Cr. Income Taxes payable
Dr. Allowance to reduce deferred tax asset to expected realizable value
Cr. income tax expense
Recognize $0 deferred tax expense loss carryforward less allowance (check?)
Valuation allowance for loss carryforward
Used when it is more likely than not that the company will NOT realize the entire carryforward benefit in future years
must have positive evidence (that carryforward benefit will be used) of quality and quantity to counteract negative evidence
depends on if sufficient taxable income exists/ will exist within the carryforward period
Recording income tax expense with deferred tax asset/liability
Dr. Income Tax expense (current + net deferred expense)
Dr. Deferred tax asset
Cr. income taxes payable (current)
Cr. deferred tax liability
leave asset and liability separate as they will act separately
Deferred tax accounts on financial statements
Shown net on balance sheet
Deferred tax liability > asset = deferred tax liability
Deferred tax asset > liability = deferred tax asset
Loss carryback
Eliminated in TCJA of 2017
provision for company to carry a net operating loss back to years and receive refunds for income taxes paid in those years
had to apply loss to earlier year first and then more recent
