Income Taxes Flashcards
Define the following terms
Taxable income.
Accounting profit.
Deferred tax assets.
Deferred tax liabilities.
Valuation allowance.
Taxes payable.
Income tax expense.
Taxable income.
Income subject to tax based on the tax return.
Accounting profit.
Pretax income from the income statement based on financial accounting standards.
Deferred tax assets.
Balance sheet asset value that results when taxes payable (tax return) are greater than income tax expense (income statement) and the difference is expected to reverse in future periods.
Deferred tax liabilities.
Balance sheet liability value that results when income tax expense (income statement) is greater than taxes payable (tax return) and the difference is expected to reverse in future periods.
Valuation allowance.
Reduction of deferred tax assets (contra account) based on the likelihood that the future tax benefit will not be realized.
Taxes payable.
The tax liability from the tax return. Note that this term also refers to a liability that appears on the balance sheet for taxes due but not yet paid.
Income tax expense.
Expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities.
When is a deferred tax liability created and when do they occur
How do you treat a DTL that will not reverse?
A deferred tax liability is created when income tax expense (income statement) is higher than taxes payable (tax return).
E.G when you have not paid enough tax
Deferred tax liabilities occur when revenues (or gains) are recognized in the income statement before they are taxable on the tax return, or expenses (or losses) are tax deductible before they are recognized in the income statement.
Deferred tax liabilities that are not expected to reverse, typically because of expected continued growth in capital expenditures, should be treated for analytical purposes as equity. If deferred tax liabilities are expected to reverse, they should be treated for analytical purposes as liabilities.
When is a deferred tax asset created and when do they occur
A deferred tax asset is created when taxes payable (tax return) are higher than income tax expense (income statement).
E.G when you have paid too much tax
Deferred tax assets are recorded when revenues (or gains) are taxable before they are recognized in the income statement, when expenses (or losses) are recognized in the income statement before they are tax deductible, or when tax loss carryforwards are available to reduce future taxable income
What is the difference between pretax income and taxable income
Pre-tax income is the total amount of money earned before taxes are taken out
Taxable income is the amount of money earned after taxes have been deducted
How do you calculate income tax expense
Taxes payable + Change in DTL - Change in DTA
DTA Tax Base
Tax base = cost - depreciation taken x tax rate creates a DTL
DTL Tax Base
Amount accrued - amount deductable
1000 - 1000 = no DTL
1000 - 9000 = 100 x tax (.3) = 30 dtl
go back to these notes i am very tired rn
Explain the impact on DTL and DTA when future tax rates decrease
DTL Decreases, Income Tax expense decreases
DTA Decreases, Income Tax expense increases
Explain the impact on DTL and DTA when future tax rates increase
DTL increases, Income Tax expense increases
DTA decreases, Income tax expense decreases
How do you change an old tax rate to a new on for a DTL / DTA
old rate
(/ -1) x DTL or DTA
New rate
Explain valuation allowances for IFRS and US GAAP
USGAAP - Full DTA is shown, partially offset by a valuation allowance
IFRS - DTA is shown but already adjusted by probability that asset will be realised
Explain the types of permanent tax differences
Tax credits
non deduct-able expenses
tex differences b/w capital gains and operating income
Calculate the effective tax rate
Income tax expense
/
pretax income
