Deferred Taxes Flashcards
What is a temporary difference related to deferred taxes?
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
What is a deferred tax asset?
Deduction will reduce future income taxes expense.
What is a deferred tax liability?
Income will be taxable in a future period and will increase future tax expense
Which period’s tax rate is used to calculate a deferred tax asset or liability?
The FUTURE enacted tax rate not the current one.
It is never discounted to present value.
What valuation allowance is used with respect to a deferred tax asset?
If it is probable 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
What effect do permanent differences have on deferred income taxes?
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
What is deferred income tax expense?
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities
GAAP Method for calculating is the Asset and Liability Approach
Note: IFRS uses the Liability approach only
How are deferred tax assets classified as current or non-current on the balance sheet?
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 from the Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet
Examples of Permanent Differences:
- Municipal Bond Interest (not taxable)
- Dividends Received (not a book deductible)
- Life Insurance Expense (not tax deductible)
- Fines or Penalties (not tax deductible)
- 50% meals for tax (100% for book)
What are the 2 differences between GAAP and IFRS regarding Deferred taxes?
- Deferred Tax Assets under GAAP are recognized in full but valuation allowances are used to reduce them to the amount that is more likely than not to be realized. IFRS recognizes Deferred Tax Assets only to the extent that they will be realized.
- Deferred Tax Assets and Liabilities may be classified as current OR not-current under GAAP. Under IFRS, they are only considered Non-Current.
What is intra-period income tax allocation?
Intraperiod tax allocation is the process of allocating income taxes for the current accounting period among the components of the income statement: continuing operations, income from discontinued operations, extraordinary items, and items of OCI.
What is the effect of allowance for doubtful accounts on taxable income?
Allowance for doubtful accounts cannot be deducted until an account is uncollectible.
Since this was not deducted for tax purposes it is considered a Deferred Tax Asset
If depreciation is less for tax purposes than it is for book, what is the effect?
There will be a Deferred Tax Liability (owe this in the future)
What is the effect of unrealized gains and losses on a Trading Security on taxable income?
The unrealized gain or loss on a trading security cannot be recognized until the security is sold. These gains and losses result in temporary differences between tax and book income.
The unrealized gains/losses will result in DTA (taxable income is more now so you pay more in taxes today)
