Transcript Accounting for Income Taxes - University of Texas at El Paso

Accounting for Income Taxes
Sid Glandon, DBA, CPA
Assistant Professor of Accounting
The University of Texas at El Paso
Fundamentals
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Pretax financial income
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Determined in accordance with GAAP
Accrual accounting
Taxable income
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Determined in accordance with IRC
Modified cash basis
Deferred Taxes
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Income tax expense differs from income
tax liability
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Temporary differences
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Tax vs. book depreciation
Reverse over time
Permanent differences
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Municipal bond interest
Does not reverse over time
Deferred Tax Liability
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Represents the increase in taxes
payable in future years as a result of
temporary taxable differences existing
at the end of the current year
Deferred Tax Asset
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Represents the decrease in taxes
payable in future years as a result of
temporary taxable differences existing
at the end of the current year
Temporary Differences
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Deferred Tax Assets
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Revenue and gains
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Expenses and losses
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Recognized for income tax purposes
Deferred in financial statements
Recognized in financial statements
Deferred for income tax purposes
Deferred Tax Liabilities
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Revenue and gains
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Recognized in financial statements
Deferred for income tax purposes
Expenses and losses
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Recognized for income tax purposes
Deferred in financial statements
Permanent Differences
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Items recognized for financial accounting
purposes but not tax
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Interest income on tax exempt securities
Fines and expenses resulting from violations of
law
Items recognized for tax purposes but not
financial accounting
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Dividends received deduction
Percentage depletion on natural resources
Sequence of Analysis
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Schedule book to tax differences to derive taxable
income
Calculate current income tax payable
Analyze temporary differences and schedule deferred
tax assets and liabilities
Prepare t-account analysis
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Deferred tax assets
Deferred tax liabilities
Schedule Net deferred tax expense (benefit)
Schedule income tax expense
Prepare journal entry
Deferred Tax Asset
Valuation Allowance Account
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Based on all available evidence
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More likely than not that some portion or
all of the deferred tax asset will not be
realized
A valuation allowance is established to
recognize the reduction in the carrying
amount of the deferred tax asset account
Valuation Allowance
ACCOUNT
DEBIT
Income tax expense
XXX
Allowance Account
To reduce deferred tax asset to expected realizable value
CREDIT
XXX
The entry records a potential future tax benefit that is not expected to be
realized in the future
Income Statement Presentation
Company
Income Statement
For the Period Ending December 31, XXXX
Revenues
Expenses
Income before income taxes
Income tax expense
Current
Deferred
Net income
$XXX,XXX
XXX,XXX
XXX,XXX
$ XX,XXX
X,XXX
XXX,XXX
$XXX,XXX
Tax Rate Considerations
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Apply the enacted tax rate for the year
in question
Use the average of the enacted tax rate
Revision of future tax rates
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The effect is reported as an adjustment to
income tax expense in the period of
change
State and foreign income taxes
Net Operating Loss
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Tax terminology
Tax deductions exceed taxable income
NOL for each year is computed
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Carry back 2 years (election-carry back
option)
Carry forward 20 years (carry forward only)
Net Loss (Operating Loss)
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Financial accounting terminology
NOL can be derived from net loss
Any tax refunds are reported in the year
of the original net operating loss
NOL Carryback
Year 2002
Gross income
Business deductions
Net loss
Dividend received deduction
NOL (tax loss)
Transaction
2002 NOL carryback
Taxable income, 2000
IRS Form
Financial
1120
Statements
$200,000
$200,000
(300,000)
(300,000)
(100,000) ($100,000)
(70,000)
($170,000)
NOL
($170,000)
40,000
Revised taxable income, 2000
NOL carryforward to 2001
Tax refund
Taxable
Income
$40,000
($40,000)
$0
Income Tax
$12,000
$0
(130,000)
$12,000
NOL CARRYBACK RULES
2000
2001
1st year
2nd year
TAX REFUNDS
2002
NOL
Carryback
Carryback
Carryforward
Carryforward
Carryforward
Carryforward
RECORD
TAX YEARS
2003
2004
2005
2022
1st year
2nd year
3rd year
20th year
TAX SHELTER
Balance Sheet Presentation
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Deferred tax classification relates to
underlying asset or liability
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Current
Noncurrent
Sum all current tax assets and liabilities
Sum all noncurrent tax assets and
liabilities
Income Statement Presentation
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Current and deferred income tax
expense is allocated to:
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Continuing operations
Discontinued operations
Extraordinary items
Prior period adjustments