DTL/DTA Flashcards
Temporary differences
Key difference is timing. These differences will reverse over time. Taxable or deductible on the tax return in a different period than reported on the books.
Temp differences are used in both the calculation of current tax expense/benefit and the calc of deferred tax expense/benefit
True
Perm difference - does not get counted in GAAP or Fin Accounting At all (only get considered in Tax ) or when an expense or income item reported on the books is neither deductible nor taxable under current tax law.
E.g. Tax penalties, penalties paid for legal violations, company receives life insurance proceeds received on the death of key employees and interest earned on municipal bonds.
DTL - book income will always be higher than the taxable income
True (Due to temp difference) e.g. Rent receivable
DTA - Book income is lower than the tax income
Tax in Fin accounting is more than tax e.g of DTA (Warranty expense, unearned rent, royalty and interest received in advance, credit loss expense)
- Revenue or Gains
- Expenses or Losses
Book income Tax return
- Revenue later Taxable now
- Expense Now Deductible later
Book expense < Tax expense
Book Income > Taxable income
DTL
Book expense > Tax expense
Book income < Taxable income
DTA
EFR pr effective rate
= Total Income Tax Expense/Pretax Book Income
Temporary difference during the reporting period * Future enacted tax rate
=DTL or DTA
DTA
Non-current asset
Less than 50% chance tax position will be allowed by tax authorities
No tax benefit recognized
NOL carryforward > 80% Taxable Income
NOL deduction limited to 80% of TI
NOL Carryforward <80% of Taxable Income
100% of NOL deductible (no limitation)
More than 50% chance tax position will be allowed by tax authorities
Largest possible estimated outcome with a cumulative probability >50% is recorded as tax benefit
Cumulative temp difference * enacted/future tax rate
DTL
DTL resulting from temporary differences happens when Book expense is less than tax expense
e.g. (1) Excess tax depreciation
(2) Investments accounted for under the equity method for books
(3) Installment sales method used for tax
(4) Prepaid expenses (cash basis for tax)
(5) Goodwill (15 year amortization for tax)
Permanent differences do not affect deferred taxes so zero ___________
DTL or no DTL to be reported
Rent received in advance will be added to determine TI
Subtract - Depreciation deducted for income tax purposes in excess of Depreciation deducted for financial statement purposes.
True
Valuation allowance is subtracted from DTA
True, Balance sheet for deferred taxes (income tax payable is not considered)
DTA - Reduces future income tax expense (i.e. taxes saved) when temporary differences reverse
DTL - Increases future income tax expense (i.e. more tax due to be paid) when temporary differences reverse
As per GAAP, justification for the method of determining periodic deferred tax expense is based on the concept of ___________
Recognition of assets and liabilities
VALUATION ALLOWANCE - JE
Income tax expense Dr. XXX
Valuation Allowance XXX
Disclosure requirements for deferred taxes
- Total DTLs, Total DTAs, Total DTA valuation allowances and net change in allowance
- Nature and type of tax effect of each difference and carryforward amount
- Operating loss carryforwards and expiration dates
- Tax credit carryforwards and expiration dates
Subtract what you receive and Add what you Pay
DTL and DTA
Effective tax rate
Current tax expense/Pretax Income
Total expense for year 3
= Current Income tax for year 3 + Deferred Income tax for year 3
DTL-Subtract
DTA - Add
Subtra
However when beginning and ending balances of DTA and DTL are provided and u need to calculate current year income tax expense. Subtract DTA and Add DTL
DTL
Cannot immediately deduct it for tax purposes
