Acct 370 Final (Taxes)

Tax expense will eventually equal gap tax expense. But why aren’t they equal in the current period?

Temporary Timing differences (DTA’s or DTL’s)

Is GAAP tax expense what we owe the government?

No, it’s just on the income statement.

DTA

deferred tax asset - future tax benefits or tax deductible amounts

DTL

deferred tax liability - future taxable amounts

Calculate tax payable

Taxable Income x Tax Rate

Permanent differences

enter taxable income or pretax GAAP income but never both
Examples: interest revenue on tax-exempt municipal bonds, proceeds from life insurance policy, fines from legal violations, premiums paid on life insurance policy

• never reverse

do permanent differences impact the effective tax rate?

yes —> must make disclosure. Does not impact income tax expense but does adjust GAAP income
Effective tax rate = Income Tax Expense/ Pretax GAAP Income

How do you convert GAAP income into Tax income?

1. Pretax GAAP Income

2. Permanent Differences [remove GAAP, add tax]

3. Temporary Differences

4. Taxable Income

5. Tax Payable [Income x Rate]

Journal Entry for permanent difference [income tax]

Dr. Income Tax Expense
Cr. Income Tax Payable

Disclosure of the statutory tax rate to the effective tax rate

Statutory Rate [IRS Rate]
Tax Exempt [Plug]
= Effective Tax Rate [Tax Expense/ Pretax GAAP Income]

DTA or DTL? Revenue/Gain reported on tax return now and NI later

Examples

DTA [lower tax revenue later; lower taxes]

Deferred Revenue: cash collected in advance for services, rent, etc.

DTA or DTL? Expense/loss reported on tax return now and NI later

Examples

DTL [higher revenue later, lower expenses, higher tax]

Accelerated Depreciation or prepaid expenses (pay cash now)

DTA or DTL? Revenue/Gain reported on NI now and tax return later

Examples

DTL [higher revenue later, higher taxes]

Installment Sales [won’t get cash until later but recognize now]
Unrealized gains [get cash once sold later]

DTA or DTL? Expense/loss reported on NI now and tax return later

Examples

DTA [lower tax revenue later, higher expenses, lower taxes]

Estimated Expenses/losses include bad debt and warranties [pay for it later but recognize now]
Unrealized losses [pay for it later]

Calculate DTA or DTL

DTA or DTL = Amount of difference x Tax Rate

How do you make a DTA or DTL schedule?

Separate by years
GAAP
Tax
Difference
DTA or DTL (Tax Rate x Difference)

Journal Entry for temporary differences creating

Dr. Income Tax Expense [plug]
Dr. DTA
Cr. Income Tax Payable

Dr. Income Tax Expense
Cr. DTL
Cr. Income Tax Payable [what we owe gov.]

Tax Expense Disclosure

Current (payable)
Deferred (DTA or DTL)
Total (Tax Expense)

Rev - expenses

Pretax GAAP income

How do you record valuation allowance for DTA’s that will more likely than not >50% be unrealized?

Dr. Income Tax Expense
Cr. Allowance to reduce DTA (+XA, -A)

How do you record for the DTA created from net operating losses carryforward? Do you need future profitability?

YES
Dr. DTA (loss x tax rate)
Cr. Income Tax Benefit