Income Taxes Flashcards
What is the primary objectives of accounting for income taxes?
- To recognize the current-year amount of taxes payable or refundable.
- To recognize the amount of DTLs and DTAs reported for future tax consequences.
How do you calculate deferred tax asset (DTA) or liability (DTL)?
DTL or DTA = Temporary difference during the reporting period * future enacted tax rate.
How do you calculate current income tax expense/benefit?
Taxable income * current income tax rate
What is a permanent difference?
This is simply an accounting difference in which an item is treated differently between the pretax book income and taxable income. Eg. nontaxable municipal bond income, nondeductible fines and federal income tax.
What is a temporary difference?
This is simply revenues or expenses that are included in the calculation or accounting net income in one year and taxable income(ie. tax return) in a different year.
How do you calculate current income tax expense?
This can be calculated by multiplying taxable income by the current enacted tax rate.
Note - estimated tax prepayments reduce the amount of taxes owed(ie. liability), not the tax expense.
What impact does deferred tax asset have on the balance sheet?
This reduce future income tax expense (ie. taxes saved) when temporary differences reverse.
What impact does Deferred tax liability have on balance sheet?
This increases the future income tax expense(ie. taxes due) when temporary difference reverse.
When should the future enacted tax rate be used to calculate DTA?
This should be used when the temporary differences between accounting and taxable income result in future taxable income’s being less than future book income.
What is dividends received deduction (DRD)?
This is a special C corp deduction for all or part of dividend income received from another C corp.
What happens when the current tax depreciation exceeds accounting depreciation or accounting income is greater than tax income and represents future taxes due?
A deferred tax liability exists when the book expense is less than tax return expense.
How do you calculate the 150% declining balance (depreciation per tax return)?
Carrying value * 1.5/useful life in years
What is the primary purpose of deferred income taxes?
This happens when there are differences in accounting net income and taxable income. As so some differences result in future taxable amounts, requiring that deferred tax liabilities be recorded because future taxes would be owed.
How do you calculate the effective tax rate?
Total income tax expense(current & deferred)/pretax book income.
How do you calculate taxable Income?
Pretax income per financial statement plus/minus Permanent differences plus/minus Temporary differences = Taxable Income
