Deferred Taxes Flashcards
What are the components of income tax expense?
- current tax expense/benefit
- deferred tax expense/benefit, exclusive of 5
- investment tax credits and grants
- benefits of operating loss carryforwards
- adjustments of a deferred tax liability or asset for enacted changes in tax laws or a change in the tax status of an enterprise
What happens with gains not recognized in the same year for tax purposes?
If it is not recognized in the same year for tax purposes as for financial accounting, then there is a temporary difference. This makes a deferred tax liability by the amount pretax accounting income exceeds taxable income times the income tax rate.
How do you calculate the current portion and deferred portion of tax expense?
Total tax expense = current + deferred portions
Current portion = Taxable income X Current tax rate
Deferred = Total of the effects of the changes in the deferred tax assets and liabilities during the period
Note first year of operations means that the opening balance in deferred tax assets and liabilities is 0.
How is a deferred tax asset or liability created?
When there is a difference between tax and accounting records. When depreciation exp is higher on the tax return than accounting, then there is a deferred tax liability- noncurrent. When a bad debt expense is higher on accounting than on tax, there is a deferred tax asset - current.
What is the required disclosure for deferred taxes?
740 - Disclosure includes:
- types and amounts of existing temporary differences
- nature and amount of each type of operating loss and tax credit carryforward
When is a deferred tax asset or liability recognized?
If a temporary difference results in future taxable amounts, a deferred tax liability is recorded in current year as a past event has resulted in a present obligation which will require a probable future sacrifice.
If a temp difference which will result in net deductible amounts in future years, a deferred tax asset is recorded.
How are loss carryforwards calculated and used?
The net operating loss carryforward is the amount of loss in prior years that is carried forward to future years to offset the tax due to those years. The value of the carryforward is the net amount X tax rate for the year to realize the carryforward.
When do you use current vs future enacted tax rates
Deferred tax liability or asset should reflect the future tax consequences so it is based on current rates unless future tax rates are enacted and are different than current.
How are deferred taxes created? What is the JE?
Deferred taxes are only created by temporary differences, differences that will reverse.
DR Income tax expense XXX
CR Deferred tax liability XXX
Reported on deferred taxes component of income tax expense on current IS.
How is interest income on municipal obligations recorded and impact tax?
This is a permanent difference and is never taxable.
How do dividends received affect deferred income tax?
Example, company uses equity method of accounting for 50% investment that earns 600k,gives 200k dividends, 400k remaining to be distributed as dividends in future, eligible for 80% dividends received deduction, income tax rate is 30%
Company under equity method includes the 50% of earnings reduced by 50% of the dividends in the investment account.
Taxable income includes the dividends but excludes the earnings. The difference between book and taxable income is 200k. This amount will be included in taxable income when distributed as dividends. The 80% DRD (permanent difference) is 160k (200k X 80%). The remaining 40k is a temporary difference that is reflected as a 12k increase in the deferred tax liability account.
What does IFRS allow for deferred taxes?
IFRS permits netting of deferred taxes if they relate to the same taxing authority and only permits deferred taxes to be classified as noncurrent.
What is the objective of accounting for income taxes?
To recognize current taxes payable or refundable and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in an enterprise’s FS or tax returns. Matching is a rationale but a less important one.
How do you calculate the current tax payable? What is changed and not changed?
Take pretax book income and adjust for differences between revenue and expenses of book and tax return.
Note penalty expense (a permanent difference) is added back to book income because it will never be deductible on the tax return. Taxable income is multiplied by current tax rate for the taxes currently payable.
Company has 3 years of income/loss 2009 100k 40% 2010 -300k 30% 2011 400k 30% What would they record in 2010 to account for the income tax refund receivable?
Using the loss carryback (which can be carried back to the two immediate past periods’ income), the company can only recover taxes already paid. The refund receivable would be the full 100k X 40% = 40k. The remainder 200k of the loss would be carried forward as a deferred tax asset of 60k (200k X 30%).
