Chapter 6 Accrual Method Flashcards
General Rule (tax)
Income is recognized (goes on tax return) when the taxpayers right to the income is fixed. Which is the earlier of: 1) when the earnings process is complete, or 2) when cash is received
Services exception
Recognize what’s earned in year 1 and all the rest in year 2 (even if not earned yet).
Inventory exception
Follow GAAP, recognize when delivered
- royalties and rent don’t fall under any exception
Differed Tax Assets
- When you pay tax before it goes on financial statements (tax asset)
- Taxable income > book revenue
- Relates to temporary differences ONLY
Differ Tax Liabilities
- relates only to temporary differences
- book revenue > taxable income
Net Book/Tax Difference = ?
Book amount + x = deduction/income (tax amount)
All Events Test:
Accrued Expense (used but not yet paid)
- Liability must be fixed
- Estimate with reasonable accuracy
- Economic performance must be performed
Recurring item exception
- We may deduct in the year of accrual services performed up to 15th day of the 9th month after year-end
IF - Regularly occurs in the business AND
- Must accrue the liability on our books
Compensation Accruals
May deduct in the year of accrual, compensation amounts PAID OUT by the 15th day of the 3rd month following the year of accrual
Related party accruals
Accrued deduction by an accrual method relates party taxpayer may not be deducted until the cash method related party taxpayer recognizes the income.
- trumps compensation accruals if applicable
Bad debt expense
Book expense = additions to allowance
Tax deduction = actual write offs
Total income tax expense
(NI before tax +/- temp diff) x tax rate
Income tax payable
(NI before tax +/- perm diff +/- temp diff) x tax rate
DTA (+) & DTL (-) =
Temporary difference * tax rate
Payment liabilities
Economic performance is satisfied when cash is paid. No service to provide.
Ex: taxes, torts, customer rebates/refunds, awards, prizes
Recurring item?
Business Interest Expense Limitation (companies over 25 million revenue)
Adjusted taxable income x 30% = Net Interest Expense Cap
Define: Net Operating Losses (NOLs)
Deductible expenses > gross income
80% limitation rule
NOL carryforwards may not offset more than 80% of taxable income
DTA Amount (NOL)
Tax NOL x Tax Rate = deferred income tax benefit
Excess Business Losses (Non-Corporate Taxpayers)
- net all business profits and losses
- any net losses carry forward indefinitely as NOL. 80% limitation applies
