Midterm1 Flashcards
ASC 740 covers which types of credits
Non refundable credits because they require taxable income
What kind of taxes does ASC 740 cover
Income taxes (Revenues - Expenses)
Taxes not covered are non income taxes like property tax, sales tax, government grants, etc
What method does ASC 740 use to calculate DTAs, DTLs, and Current Tax Expense
Liability/Balance Sheet Method
Which tax rates do you use when estimating DTA/DTLs
The tax rate in the year the deferred accounts are expected to reverse
What is a deductible temporary difference and a taxable temporary difference
Deductible temporary difference is paying taxes now, receiving deduction later - DTA
Taxable temporary difference is receiving deduction now, pay higher taxes later - DTL
What differences alter the effective tax rate
Permanent Differences
What is the journal entry to record a DTA and DTL
What are factors to consider when netting DTAs and DTLs
Class of income - STCG/Ordinary/Foreign
Timing of reversal
What is the blended tax rate
The blended statutory rate in all jurisdictions operated in by the company
(State + Local + Federal taxes)/(Net income)
What do you report in the footnote of financial statements
Components of the total tax liabilitiy paid by the corporation, DTAs, DTLs
Fact Pattern: At the end of Y2022 tax expense was determined to be 210k. In september of Y2023 you discover taxes owed for prior year was only 200k. This was partially due to a change in the DTL balance of 4200. Describe the journal entries needed
What are the requirements for ASC 740 that companies must follow?
- Determine the deferred taxes for each tax paying component
- Identify types and amounts of existing temporary differences
- Identify the nature and amount of each type of operating loss and tax credit carryforward and remaining length of the carryforward period
When do you recognize a change in tax law
The enactment date is the date the bill gets signed into law by the president. Occurs in quarterly financials of bill becoming law. You cannot go back and adjust prior years because it is a remeasurement (change in estimate)
What happens when you file for a change in discretionary method
Automatic changes does not require approval from the IRS (apply when filed)
Non Automatic changes require approval from the IRS as the method change is not listed in applicable IRS guidance (apply in period approved)
What are the two types of changes
Discretionary (Automatic and Non-Automatic)
Nondiscretionary
What is a Tax Valuation Allowance
Reduce DTAs by a valuation allowance based on whether it is more likely than not >50% that some portion or all of the DTAs will not be realized. Only applies to DTAs
How do you weigh the evidence for a DTA
All available evidence shall be considered (positive or negative) for whether a valuation account is needed
What are the four sources of taxable income
- Taxable income in prior carryback years if carryback is permitted under tax law
- Future reversals of existing temporary differences
- Tax planning strategies
- Future taxable income (exclusive of reversal of DTLs and CFs)
What is the most objective to least objective source of taxable income
- Taxable income in prior carryback years, if carryback is permitted under tax law
- Future reversals of existing taxable temporary differences
- Tax planning strategies
- Future taxable income (exclusive of reversing temporary differences and carryforwards)
What is a cumulative loss
A cumulative loss is when you look at current year and two years prior, if cumulative taxable income is negative ASC 740 guidance states you need a full valuation account in absence of compelling positive evidence (cannot use source 4 income).
Must release valuation account when positive evidence outweighs negative. Cumulative loss is considered significant negative evidence
What are the characterisitcs of the first source of income
Most objective source of evidence, consideration of appropriate class of income, evaluation on an individual basis for each significant taxing authority. Anticipation of tax consequences from future losses is prohibited
What are the characteristics of the second source of income
Existing DTLs that will reverse and allow for realizations of DTA. Must consider potential mismatch of DTA/DTL by jursidiction, character, and reversal period. Anticipation of future losses prohibited. Canadian DTA cannot offset an American DTL. DTLs associated with indefinite reversal period can be setoff by DTAs with an indefinite reversal period to the limit of the DTA (NOL CFS 80%)
What are the characteristics of the third source of income
Prudent and Feasible: Would do it, and Could do it. Strategies that may be undertaken to prevent an expiring DTA from going unused. Doesn’t apply to NOLs anymore, does to capital losses and foreign tax credits. Does not create income, changes character of income (STCG -> Ordinary) or accelerates timing of DTL or nature of income (tax exempt to non tax exempt)
What are the characteristics of the fourth source of income
You believe you will have future taxable income in a jurisdiction within the life of the DTA (most subjective)
A subsidiary earns $1000 in income at 21% tax rate. A U.S. firm owns 70% of the subsidiary, explain which source of income this falls under
DTL on the income from sub of $790 (GAAP records income in consolidation but tax law requires 80% to consolidate) that will eventually reverse. It is assumed under ASC 740 a profitable subsidiary will eventually pay dividends for tax purposes
This makes income from GAAP consolidated subsidiaries a DTL because there is no tax basis in “Income from Subsidiary” under GAAP. SOURCE 2 INCOME
