P1.A.2.6 Income Taxes

Question 1

What is a Deferred Tax Asset (DTA)?

P1.A.2.6 Income Taxes

Answer 1

1. Income tax expense on income statement < Income tax payable on tax return
2. Expected to be recovered in the future.
3. Revenue recognized on return but not on income statement: unearned rent income, customer deposits on future services
4. Expenses deducted on income statement but not on return: accrued expenses but not paid
5. Net Operating Loss (NOL) carryforward: 80%

Question 2

What is a Deferred Tax Liability (DTL)?

P1.A.2.6 Income Taxes

Answer 2

1. Income tax expense on income statement > Income tax payable on tax return
2. Expected to be settled in the future
3. Revenue recognized on income statement but not on return: revenue earned but not yet received
4. Expenses already deducted on return but not on income statement: differences in depreciation methods.

Question 3

What are Temporary Differences?

P1.A.2.6 Income Taxes

Answer 3

Difference in pretax financial income and taxable income that’s reversed in future.

1. Taxable temporary differences
2. Deductible temporary differences
3. Operating loss carryforward

Question 4

What are Permanent Differences?

P1.A.2.6 Income Taxes

Answer 4

Differences in pretax financial income and taxable income that won’t be reversed in the future.

1. Non-taxable revenues: muni bond interest
2. Non-deductible expenses: BOLI