Tax Analysis Flashcards
What is accounting profit?
Reported on its income statement in accordance with prevailing accounting standards. It is the same as pretax income or income before taxes.
What is taxable income?
A company’s taxable income is the basis for its income tax payable (a liability) or recoverable (an asset), which appears on its balance sheet. Income tax paid in a period is the cash amount paid for income and reduces the income tax payable.
What is the difference between the tax base and the carrying amount?
The tax base of an asset or liability is the amount at which the asset or liability is valued for tax purposes, whereas the carrying amount is the amount at which the asset or liability is recorded in the financial statements. The tax bases and carrying amounts of assets and liabilities can differ based on differences in accounting standards and the relevant tax laws. Common differences are as follows:
- Revenues and expenses may be recognized in one period for accounting purposes and a different period for tax purposes.
- Specific revenues and expenses may be either recognized for accounting purposes and not at all for tax purposes, or vice versa.
- The deductibility of gains and losses of assets and liabilities may vary for accounting and income tax purposes.
- Subject to tax rules, tax losses in prior years might be used to reduce taxable income in later years, resulting in differences in accounting and taxable income (tax loss carryforward).
- Adjustments of reported financial data from prior years might not be recognized equally for accounting and tax purposes or might be recognized in different periods.
What are temporary and permanent differences?
Temporary differences reverse in future periods while permanent differences will not.
What are two categories of temporary differences?
Taxable temporary differences
Deductible temporary differences
What are taxable temporary differences?
Taxable temporary differences result from the carrying amount of an asset exceeding its tax base or when the tax base of a liability exceeds its carrying amount. Taxable temporary differences result in the recognition of deferred tax liabilities.
What are permanent tax differences?
Permanent differences are differences between tax laws and accounting standards that will not be reversed at some future date. Because they will not be reversed at a future date, these differences do not give rise to deferred tax. These items typically include the following:
- income or expense items not allowed by tax legislation, such as penalties and fines that are considered expenses for financial reporting purposes, but are not deductible for tax purposes.
- tax credits for some expenditures that directly reduce taxes. An example is tax credits provided by tax authorities to encourage the purchase of solar power or an electric vehicle.
Because no deferred tax item is created for permanent differences, all permanent differences result in a difference between the company’s tax rate and its statutory corporate income tax rate.
What is a deferred tax asset?
Deferred tax assets represent taxes that have been paid (or often the carrying forward of losses from previous periods) but have not yet been recognized on the income statement.
What is a deferred tax liability?
Deferred tax liabilities occur when financial accounting income tax expense is greater than regulatory income tax expense.
Under US GAAP, a valuation allowance would be established to reduce the amount of deferred tax asset to the amount that is more likely to be realized.
What is the statutory tax rate?
The corporate income tax rate in the country in which the company is domiciled.
What is the effective tax rate?
The reported income tax expense amount on the income statement divided by the pre-tax income.
What is the cash tax rate?
The tax paid in cash that period (cash tax) divided by pre-tax income.
