Income Taxes Flashcards
What is taxable income?
Income subject to tax based on the tax return.
What is accounting profit?
Pretax income from the income statement based on financial accounting standards.
What are 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.
What are 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.
What is a valutaion allowance?
Reduction of deferred tax assets (contra account) based on the likelihood that the future tax benefit will not be realized.
What are 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.
What is 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?
When income tax expense (income statement) is higher than taxes payable (tax return).
How do deferred tax liabilities occur?
They 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.
When is a deferred tax asset created?
When taxes payable (tax return) are higher than income tax expense (income statement).
Under what three instances should a deferred tax asset be recorded?
- Revenues (or gains) are taxable before they are recognized in the income statement,
- Expenses (or losses) are recognized in the income statement before they are tax deductible
- Tax loss carryforwards are available to reduce future taxable income.
Are deferred tax liabilities expected to reverse?
No, typically because of expected continued growth in capital expenditures, should be treated for analytical purposes as equity.
How are deferred tax liabilities that are expected to reverse treated?
They should be treated for analytical purposes as liabilities.
What is an asset’s tax base?
- Its value for tax purposes.
- Equals its cost minus any depreciation or amortization previously taken on the tax return.
What is a liabilities tax base?
- Its value for tax purposes.
- When there is a difference between the book value of a liability on a firm’s financial statements and its tax base that will result in future taxable gains or losses when the liability is settled, the firm will recognize a deferred tax asset or liability to reflect this future tax or tax benefit.
When taxable income is less than pretax income and the cause of the difference is expected to reverse in future years, a ___ is created.
Deferred Tax Liability
When taxable income is greater than pretax income and the difference is expected to reverse in future years, a ___ is created.
Deferred Tax Asset
What does the balance of the DTA or DTL equal?
The difference between the tax base and the carrying value of the asset or liability, multiplied by the tax rate.
How is income tax expense calculated?
income tax expense = taxes payable + ΔDTL − ΔDTA.
How does an increase in a firm’s tax rate affect their DTA and DTL?
Deferred tax assets and deferred tax liabilities are both increased to reflect the new rate.
How does an increase in a firm’s tax rate affect their DTL and income tax expense?
Increases both a firm’s DTL and its income tax expense.
How does a decrease in a firm’s tax rate affect their DTL and income tax expense?
Decreases both a firm’s DTL and its income tax expense.
How does a increase in a firm’s tax rate affect their DTA and income tax expense?
Increases a firm’s DTA and decrease its income tax expense.
How does a decrease in a firm’s tax rate affect their DTA and income tax expense?
Decreases a firm’s DTA and increase its income tax expense.
What is a temporary difference?
A difference between the tax base and the carrying value of an asset or liability that will result in taxable amounts or deductible amounts in the future.
What is a permanent difference?
A difference between taxable income and pretax income that will not reverse in the future.
Permanent differences do not create DTAs or DTLs.
