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
