Section 19 - Accounting for Income Taxes (Deferred Taxes) Flashcards
What are the two type of differences between pretax GAAP income and taxable income?
1) Permanent differences
2) Temporary differences
What is a Permanent difference?
A difference that will appear on either the financial statements or the tax return, BUT NOT BOTH.
What are examples of Permanent difference?
- Municipal bond interest (not taxable)
- Dividends received deduction (DRD) (not a book deduction)
- Life insurance expense, when the company is the beneficiary (not tax deductible)
- Life insurance proceeds
- Fines or penalties (not tax deductible)
- 50% meals and entertainment for tax (100% for book)
- Federal income tax payments
What is a Temporary difference?
GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another.
Will result in taxable or deductible in the future and reported as an asset or liability.
Differences will reverse over time.
When is Temporary Difference a “Deferred tax liabilities” aka taxable temporary difference (TTD)?
Book Expense Taxable Income
When is Temporary Difference a “Deferred tax assets” aka deductible temporary difference (DTD)?
Book Exense > Tax Expense
Book Income
What are examples of Temporary difference - DEFERRED TAX LIABILITIES (TTD)?
- Depreciation methods
- Investments accounted for under the equity method for book, and cost method for tax (more income for book today, so owe government money later)
- Accrual sales for book, and installment sales method for tax (more book income today, owe government money later)
- Prepaid expenses (cash basis for tax)
- Goodwill (15 year amortization for tax and tested annually for GAAP)
What are the JEs for Temporary difference - DEFERRED TAX LIABILITIES (TTD)?
JE - Year 1
Income tax expense (PLUG)
Deferred tax liability
Current tax liability
JE - Year 2
Income tax expense (PLUG)
Deferred tax liability
Current tax liability
What are examples of Temporary difference - DEFERRED TAX ASSETS (DTD)?
- Warranty expense for book today, but deductible for tax when you pay it (tax expense is less today, so income is higher)
- Rent, royalty, and interest received in advance is taxed when received, but for book, when earned.
- Bad debt expense - for tax, use direct write-off, for books an allowance approach
- Contingent Liabilities
What are the JEs for Temporary difference - DEFERRED TAX ASSETS (DTD)?
JE - Year 1
Income tax expense (PLUG)
Deferred tax asset
Current tax liability
JE - Year 2
Income tax expense (PLUG)
Deferred tax asset
Current tax liability
What is a “Deferred tax asset valuation allowance”?
If it is “probable” - more likely than not that not all of a Deferred Tax Asset (Debit) will be realized, then the Deferred Tax Asset account must be written down (Credit) to reflect this probability.
What is the formula to find out what Current Tax Liability is?
Pretax Book Income \+- Permanent Difference =Book Taxable \+- Temporary Difference =Taxable Income x Current Tax Rate =Current Tax Liability -Prepayment =Tax payable
How many years back and forward can an entity carry Net Operating Losses (NOL)?
2 years back and 20 years forward
How are Deferred Tax Assets and Liabilities reported on the Balance Sheet?
- All current amounts are netted and reported as a single amount on the Balance Sheet
- All non-current amounts are netted and reported as a single amount on the Balance Sheet
Are Temporary Differences required to be disclosed?
Yes but not Permanent Differences
