Income Taxes Flashcards
Interperiod tax allocation differences between GAAP and tax code
GAAP isn’t the law. Tax code is.
Income tax expense
plug number from taxes payable and deferred taxes (taxes not yet due as cash hasn’t been received)
Income statement
always uses income tax expense
Net operating loss
negative taxable income. Can be carried back two years and carried forward 20 years
FASB 109
adopted asset/liability approach. Deferred tax expense is the net change in deferred tax accounts for the year, measured at the enacted tax rate in which temporary differences reverse.
Common permanent differences
tax exempt interest, fines & penalties, lfie insurance premiums on key employees, dividends received deduction, depletion
Cost depletion
= (year end unrecoverable depletion cost/ estimated remaining units recoverable at beg year) * units sold
Statutory (percentage) depletion
Percent depletion method determined by multiplying statutory percentage by income from property. Statutory percentage is predetermined and varies depending on the type of natural resources. Varies between 5 - 22%, but deduction is not to exceed 50% (except oil and gas which can be 100%).
MACRS
Modified accelerated cost recovery system - IRS table for depreciation
Deferred tax liability examples
Future Acct Inc < taxable income
Prepaid expenses, A/R, SL depreciation for FR vs MACRS for tax, installment sales (Point of sale for books), completed contract for tax and % complete for books, unrealized gain on trading securities
Deferred tax asset examples
Future Acct Inc > taxable income
Unearned revenue, bad debt expense, estimated warrante expense, carry forward of net operating loss, recognized estimated loss for books (lawsuit)
J/E for Tax Accrual - assuming full tax liability paid in year 2
Income Tax Expense - Plug
Deferred tax asset - (F deducible Dif X F tax r)
Deferred tax liability - (F taxable dif xF tax r)
Income tax payable - tax inc x P tax r
Future and current rates will be the same unless congress passes a new rate.
Total Income tax expense
= current taxable + deferred taxable
Must be on I/S or in notes
Effective Tax rate
= total income tax exp/pre tax accounting inc.
Dividends received deduction
Means 80% is tax free, so only 20% is taxable - this is a permanent difference
Deferred tax liability
= beg def tax liability - end def tax liability
Ending Def Tax liability
= tax rate X future taxable difference
Current provision of income tax
= Year’s income tax payable
Income tax expense
= current inc tax provision +/- deferred provision
Deferred tax accounts
Current is for a current account.
Noncurrent is for a non-current account.
Except future differences associated with more than one account.
Depreciation classification?
Current or noncurrent?
Non-current - because plant assets are classified as noncurrent
Uncertainty in income tax
If there is at least 1/3 probability that tax position will be sustained, no legal or professional issues.
Uncertain tax position with >50% probability of being sustained
Use dollar amount associated with largest amount with probability greater than 50%. Note, these are cumulative probabilities not multiplicative.
Net operating losses
Deductions exceed taxable revenues. Can be carried back 2 years and forward 20 years. Value is the tax saved!
NOL J/E
Income Tax Refund Receivable
Income Tax Benefit - NOL CB
If not fully used:
Deferred Tax Asset (value = $ X T%)
Income Tax Benefit - NOL CF
NOL I/S
Pretax Income
Income Tax Benefit (sum of CB CF in year)
Net Income (loss)
Ending Deferred Tax Asset =
= sum of future deductible differences, including NOL CF, X future tax rate.
Subtract beginning DTA balance to get the change.
Income tax benefit(expense)
= Ending balance - Beginning balance
