Flashcards in Income Taxes Deck (49)
When is income tax expense recognized?
Income tax expense is recognized when it is incurred, regardless of when the payment is actually made to the Internal Revenue Service. The process of recognizing income tax expense is called interperiod tax allocation. This process ensures proper matching of income tax expense with revenues.
Does GAAP emphasize the matching concept on income tax accounting?
No, the emphasis is on the correct measurement of the income tax assets and liabilities.
What are the main effects of applying the asset/liability approach in income tax accounting?
1. Income tax expense for the period reflects the amount that will ultimately be payable on the year's transactions.
2. The income tax payable account, deferred tax asset account, and deferred tax liability account report the remaining tax receivables and obligations facing the firm from transactions that have already occurred as of the balance sheet date.
3. Income tax expense is an amount derived from the changes in the tax-related assets and liabilities. It is no longer a directly computed value.
What is a taxable item?
Amounts that cause income tax to increase. This is an Internal Revenue Code term and typically refers to revenues that cause taxable income to increase.
What is a deductible item?
Amounts that cause income tax to decrease. This is an Internal Revenue Code term and typically refers to expenses that cause taxable income to decrease.
What is pretax income?
Income before income tax for financial accounting purposes determined by applying GAAP.
What is taxable income?
Income before tax for tax purposes. This is the analogue of pretax accounting income. Taxable income is the amount to which the tax rates are applied in determining the income tax liability for the year.
What is an income tax liability?
The amount of income tax the firm must pay on taxable income for a year.
What is an income tax expense?
The account reported in the income statement that measures the income tax cost for the year's transactions. Income tax expense equals the income tax liability plus or minus the net change in the deferred tax accounts for the period.
What is the current income tax provision?
This term is used in the income statement to refer to the amount of income taxes due for the year. This amount is the same as the income tax liability for the year.
What is the deferred income tax provision?
The amount of income tax expense that is not currently due. This amount equals the net sum of the change in the deferred tax accounts.
What is a permanent difference?
An amount that appears in the tax return or income statement but never both. These include items of revenue or expense that are never taxable or deductible; also taxable and deductible items that never appear in the income statement. This type of difference is also called a nontemporary difference.
What is a temporary difference?
An item of revenue or expense that, over the total life of the item, will affect pretax accounting income and taxable income in the same total amount, but will be recognized in different amounts in any given year for financial reporting and tax purposes.
What is a net operating loss?
Negative taxable income (strictly a tax term). A net operating loss can be carried back 2 years to reduce taxable income in those years for a refund of taxes, and carried forward 20 years to reduce taxable income and therefore the tax liability in future years.
What is a deferred tax asset?
The recognized tax effect of future deductible temporary differences. These differences, caused by transactions that have occurred as of the balance sheet date, will cause future taxable income to decrease relative to pretax accounting income.
What is a deferred tax liability?
The recognized tax effect of future taxable temporary differences. These differences, caused by transactions that have occurred as of the balance sheet date, will cause future taxable income to increase relative to pretax accounting income.
What is interperiod tax allocation?
The process of measuring and recognizing the total income tax consequences of transactions in the year. Only temporary differences and net operating loss carry forwards enter into this process.
What are some examples of permanent differences?
Tax-Free Interest Income
Life insurance expense
Proceeds on Life Insurance
Dividends Received Deduction
Fines and Penalties
What are the 4 types of temporary differences
A. Taxable After Recognized for the Books -- Revenues or Gains that are Taxable after they are Recognized in Financial Income
B. Deductible After Recognized for the Books -- Expenses or Losses that are Deductible after they are Recognized in Financial Income
C. Taxable Before Recognized for the Books -- Revenues or Gains that are Taxable before they are Recognized in Financial Income
D. Deductible Before Recognized for the Books -- Expenses or Losses that are Deductible before they are Recognized in Financial Income
What is an originating difference?
When an item causing a temporary difference first occurs
What is a taxable temporary difference?
involves differences that initially cause a postponement in the payment of taxes
In the year of origination, the item causes taxable income to decline relative to pretax accounting income
When the item reverses, the item causes future taxable income to exceed pretax accounting income
Future taxable differences give rise to deferred tax liabilities
What is a deductible temporary difference?
Involves differences that initially cause a prepayment of taxes.
In the year of origination, the item causes taxable income to increase relative to pretax accounting income.
When the item reverses, the item causes future taxable income to be less than pretax accounting income.
Future deductible differences give rise to deferred tax assets.
What are examples of Taxable Temporary Differences (DTL)?
Completed contract for tax, % of completion on books
Unrealized Gain on trading securities
What are examples of DeductibleTemporary Differences (DTA)?
Carryforward of NOL
Recognized Estimate from Lawsuit
What is the equation for taxable income?
+/- Originating Temporary Differences
+/- Permanent differences
= Taxable income
How do you calculate deferred tax expense?
= increased rate on future taxable amounts outstanding at beginning of year + amount related to current year originating temporary differences
What journal entries are used to report income tax expense?
Income Tax Expense a "plug" figure
Deferred Tax Asset * see below
Deferred Tax Liability ** see below
Income Tax Payable taxable income x current tax rate
* The amount to increase the deferred tax asset to its required ending balance, which is the total future deductible temporary difference multiplied by the future enacted tax rate.
** The amount to increase the deferred tax liability to its required ending balance which is the total future taxable temporary difference multiplied by the future enacted tax rate.
What is the effective tax rate?
The effective tax rate is the ratio of income tax expense to pretax accounting income.
What are the general steps for interperiod tax allocation?
Steps Leading to the Tax Accrual Entry:
1. Compute taxable income and multiply by current tax rate.
2. Analyze all future individual temporary differences, separating them into taxable and deductible categories.
3. Apply the future enacted rate(s) to the taxable differences and aggregate.
4. Apply the future enacted rate(s) to the deductible differences and aggregate.
5. Net sum equals income tax expense