Income Taxes

Question 1

Uncertain Tax Positions

Answer 1

If the company determines a position is more likely than not (>50%) to be sustained, then its effects will be recognized in the financial statements. If the possible outcomes are varied, the company will take the largest benefit that is more likely than not to be realized.

Question 2

Permanent differences

Answer 2

Permanent differences arise from interest on something like municipal bonds- there would be interest income in accounting income, but it wouldn’t be counted in taxable income.

Never reverse

Any tax-exempt interest
Fines and penalties
Life insurance premiums on key employees
Dividends received deduction

Question 3

Temporary Differences

Answer 3

These are items that are recognized in different years between accounting income and tax income. Items that will taxable in the future create a deferred tax liability, because there is an amount that will increase taxable income in the future, and therefore increased taxes. Items that will be deductible in the future create a deferred tax asset, because it will reduce taxable income in the future.

Question 4

Valuation Allowance

Answer 4

A valuation allowance is a contra account to the deferred tax asset. Uses a more likely than not standard to determine if a valuation allowance should be used or not.

Question 5

Net Operating Losses

Answer 5

When you have deductions that exceed your taxable income, or negative taxable income, a net operating loss is created. This can be carried back or forward to absorb taxable income in the past or future. NOLs can be carried back 2 years, and forward 20 years.