Income Taxes Flashcards
Taxable income
Portion of the income subject to tax
Taxes payable
The tax liability caused by taxable income. This is also known as current tax expense, but do not confuse this with income tax expense
Income tax paid
The actual cash flow for income taxes including payments or refunds from other years.
Tax loss carryforward
A current or past loss that can be used to reduce taxable income (thus, taxes payable) in the future. Can result in a deferred tax asset.
Tax base
Net amount of an asset or liability used for tax reporting purposes.
Accounting profit
Accounting profit = EBT (Earnings before taxes)
Income Tax Expense
Expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities (DTA and DTL). The income tax expense equation is:
income tax expense = taxes payable + ΔDTL − ΔDTA
When income tax expense (R) < income tax payable (T)
deferred tax asset is created
When income tax expense (R) > income tax payable (T)
deferred tax liabilities are created
Accounting profit (EBT) may not be equal to taxable income b/c:
- temporary differences in the recognition of expenses and revenue
- permanent differences
Valuation allowance
Reduction of deferred tax assets based on the likelihood that the assets won’t be realized
Permanent difference
A permanent difference between taxable income (tax return) and pretax income (income statement) that will not reverse in the future
Temporary difference
A temporary difference between the tax base and the carrying value of an asset/liability that will result either in DTL or DTA
For tax purposes, bad debt expense cannot be
deducted from A/R until the receivables are deemed worthless
If DTL are expected to reverse in the future, they are best classified as
liabilities
