Deferred Taxes

Question 1

What is a temporary difference related to deferred taxes?

Answer 1

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another

Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income

Question 2

What is a deferred tax asset?

Answer 2

Deduction will reduce future income taxes expense.

Question 3

What is a deferred tax liability?

Answer 3

Income will be taxable in a future period and will increase future tax expense

Question 4

Which period’s tax rate is used to calculate a deferred tax asset or liability?

Answer 4

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

Question 5

What valuation allowance is used with respect to a deferred tax asset?

Answer 5

If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this

Question 6

What effect do permanent differences have on deferred income taxes?

Answer 6

They have no tax impact.

When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate

Examples are:

• tax exempt interest (municipal, state)
• life insurance proceeds on officer’s key man policy
• life insurance premiums when corporation is the beneficiary
• certain penalties, fines, bribes, kickbacks, etc
• nondeductible portion of meal and entertainment expense
• dividends received deduction for corporations
• excess percentage depletion over cost depletion
• depreciation differences due to different basis of asset
• investment interest expense is limited to net (taxable) investment income

Question 7

What is deferred income tax expense?

Answer 7

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only

Question 8

How are deferred tax assets classified as current or non-current on the balance sheet?

Answer 8

Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet

Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

Question 9

What are examples of temporary differences?

Answer 9

Temporary differences that cause deferred tax are:

• installment sales
• rents and royalties in advance
• dividends under the equity method
• bad debt
• est liability for contingency (warranty)
• contributions
• deprecation differences from MACRS
• section 179 depreciation
• amortization differences for start-up/organization costs (tax is $5k max + 15 year excess), franchise/goodwill (tax is over 15 years)
• depletion differences
• profit and pension expense (tax no deduction until paid)
• accrued expenses
• net capital losses (tax 3 years back, 5 years forward)
• net operating loss (tax NOL 2 back, 20 forward)
• R&D (tax amortize)