Ch. 5 - Corporate Operations Flashcards
(110 cards)
Corporate tax formula
Gross income - deductions = taxable income x tax rates = reg income tax liability \+ other taxes = total tax -credits -prepayments = taxes due (or refund)
Accounting methods for corporations
Generally must use accrual
Corporations with average gross receipts of $5 million or less for the three years prior to the current tax year may use the cash method
book-tax differences
When items of income and expense are accounted for differently for book and tax purposes
unfavorable book-tax difference
requires an add back to book income to compute taxable income b/c increases taxable income (and taxes payable) relative to book income
favorable book-tax difference
requires corp to subtract difference from book income in computing taxable income b/c decreases taxable income (and taxes payable) relative to book income
permanent book-tax difference
- Arise from items that are income or deductions during the year for book or tax purposes, but not both
- Do not reverse over time
- Long-run effect is that total amount of income or deductions for the items is different for book and tax purposes
temporary book-tax difference
- income or deduction items are included in book income in one year and taxable income in a different year
- Reverse over time
- temporary differences that are initially favorable will become unfavorable when they reverse and vice versa
Why is distinguishing between permanent and temporary book-tax differences important?
- large corps are required to disclose their permanent and temp book-tax differences on their tax returns
- it is useful for those responsible for computing and tracking book-tax differences. For temporary book-tax differences it is important to understand how the items were accounted for in previous years to appropriately account for current year reversals
Interest income from muni bonds
Permanent favorable
Income included in book income, excluded from taxable income
Death benefit from life insurance on key employees
Permanent favorable
Income included in book income, excluded from taxable income
Interest expense on loans to acquire investments generating tax exempt income
Permanent unfavorable
deductible for books, but expenses incurred to generate tax-exempt income are not deductible for tax
Life insurance premiums for which corporation is beneficiary
Permanent unfavorable
deductible for books, but expenses incurred to generate tax-exempt income (life insurance death benefit) are not deductible for tax
Meals and entertainment expenses
Permanent unfavorable
fully deductible for books, but only 50% deductible for tax
Fines and penalties and political contributions
Permanent unfavorable
deductible for books, but not for tax
Domestic production activities deduction (DPAD)
Permanent favorable
deduction for businesses involved in manufacturing activities in the US equal to the lesser of 9% of the company’s qualified production activities income (QPAI) or taxable income computed without the DPAD (ie the DPAD cannot create a NOL)
Cannot exceed 50% of wages
Federal income tax expense
Corporations deduct federal income tax expense in determining book income, but are not allowed to deduct federal income tax expense for tax purposes. The book-tax provision acts as a permanent difference if the corp is reconciling after-tax book income with taxable income
Depreciation expense
Temporary favorable
Difference between accelerated depreciation expense for tax purposes and straight-line depreciation expense for book purposes
Gain or loss on disposition of depreciable assets
Temporary unfavorable
Difference between gain or loss for tax and book purposes when corp sells or disposes of depreciable property. Difference generally arises because depreciation expense, and thus the adjusted basis of the asset is different for tax and book purposes. This difference is essentially the reversal of the book-tax difference for the depreciation expense on the asset sold or disposed of.
Bad debt expense
Temporary unfavorable
Direct write-off method for tax, allowance method for books
Unearned rent revenue
Temporary unfavorable
Taxable on receipt but recognized when earned on books
Deferred compensation
Temporary unfavorable
Deductible when accrued for books, but deductible when paid for tax if accrued but not paid with 2.5 months after year-end. Also, accrued compensation to shareholders owning more than 50 percent of the corp is not deductible until paid
Organizational expenses and start-up costs
Temporary unfavorable
Immediately deducted for books, but capitalized and amortized for tax (limited immediate expensing allowed for tax)
Warranty expense and other estimated expenses
Temporary unfavorable
Estimated expenses deducted for books, but actual expenses deducted for tax
UNICAP
Temporary unfavorable
Certain expenditures deducted for books, but capitalized to inventory for tax. Difference reverses when inventory is sold