FAR 5 Flashcards
The 2 seperate sets of accounts for deferred taxes are maintained
- F/s governed by the FASB GAAP rules
- Income tax returns governed by IRS tax code
IRS
Internal Revenue Service
Income tax expense =
Income tax expense (current) + income tax expense (deferred)
Income tax current
Current taxable income * current tax rate
Income tax deferred
Deferred tax liability for the yr - deferred tax assets for the yr
Difference between book income and taxable income
Permanent
Temporary
Permanent difference
Items of revenue or expense that are taxable or deductible under current tax provisions appear either in f/s or tax returns but not both
May be added or subtracted from book pre-tax income to arrive at book taxable income
Subtract - income for GAAP but non taxable by IRS
ADD - deduction under GAAP but non deductible under IRS
Temporary difference
Deferred tax liability- deferred tax assets
Deferred tax liability
Are expected future tax liability arising due to temporary differences
More book income today
- tax incited today but to be paid later
Deferred tax assets
Expected future tax benefits arising due to temporary differences
More tax income today
- tax to be incurred later but paid today
Calculation of taxable income
Start with book income (net of income tax )
Adjust permanent difference
+ if tax income > book income
- if book income > tax income
Adjust temporary differences
+ if tax income > book income DIFFERENCE CREATING DTA - add
- if book income > tax income DIFFERENCE CREATING DTL - Less
= taxable income or tax return
Calculate income tax expense =
Income tax expenses current + income tax expense deferred
Income tax expenses current + income tax expense deferred
Income tax expense current = taxable income * current tax rate
Income tax deferred = deferred tax liability - deferred tax assets
A cumulative deductible implies a
Deferred current assets since it is deductible in future
A cumulative taxable difference implies a
Deferred tax liability since is taxable in future it is a liability
Revenues under GAAP non taxable under irs rules (permanent difference)
State and municipal bond interest income
Life insurance proceeds on officers key man policy
Expenses under GAAP non deductible under irs rules (permanent difference)
-Fines penalties bribes and kickbacks
-Non deductible portion of meal and food entertainment expenses
- life insurance premiums when corporations is beneficiary
- excess percentage depletion over cost depletion
Valuation allowance account
If it is more likely (>50%) that part or all the deferred tax assets will not be realised a valuation allowance is recognised
J/em
Income tax expense (deferred)
To deferred tax asset valuation allowance
J/e for income tax current
Income tax expenses
To income tax payable
J/r fir deferred tax liability
Income tax expense (deferred )
To deferred tax liability
J/e for deferred asset
Deferred tax assets
To income tax expense deferred
