Income Taxes

Question 1

Valuation Allowance

Answer 1

• Only deferred tax liabilities can be reduced by valuation allowance
  
  • But only if it is more likely than note that some or all of the deferred tax assets will not be realized
  • Valuation allowance should reduce the deferred tax asset to the amount that is more likely than not be realized considering both positive and negative evidence
    Included in income from operations

Question 2

DTA - Tax Income > Book Income

Answer 2

○ Expenses are recognized in financial income before they are recognized in tax income
§ Because that would decrease book income, so tax income would be higher amount
Entity incurs an accounting expense such as bad debt write offs but doesn’t recognize for tax periods until a future period
- Warranty expense and the related liability recognized under GAAP at the time of sale but deferred for income tax purposes until paid
○ Pushing forward the receipt of the rent in cash (when it will be taxed) will defer taxes to the future and add to later taxes due

Question 3

DTL - Tax Income

Answer 3

○ Expenses are recognized in taxable income before book income
Most common DTL is use of accelerated depreciation for tax purposes only - more tax expenses are taken immediately than for book accounting, thus leaving fewer tax deductions for future use and higher taxes to pay later on - thus a DTL
Installment sales and the related asset recognized under GAAP at the time of sale but deferred for income tax purposes until collected
Increase in Rent Receivable - pushing forward the receipt of the rent in cash (when it will be taxed) can also defer taxes to the future and add to later taxes due

Question 4

Tax Position

Answer 4

• A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods

Question 5

Permanent Differences

Answer 5

• Not expected to reverse in the future
  
  • Items either included in taxable or financial income
    
    • Interest received on investments in municipal securities that is included in the determination of financial income but is not taxable
    • Insurance premiums paid on policies for which the company is beneficiary that are not deductible for tax purposes
      Depletion in excess of cost that is deductible for income tax purposes but not included in the determination of financial income

Question 6

Net Operating Loss - Carryforward

Answer 6

• Maximum tax benefit is the amount of net operating loss multiplied by the tax rate
  Loss carryforward is a deferred tax asset at the total future deductible amount applied by future tax rate that will be available for later tax deductions