Video Notes: Deferred Taxes — Taxable Income vs GAAP Income (Temporary vs Permanent Differences)

Practice flashcards covering taxable vs. book income, temporary vs. permanent differences, the four-step deferred tax process, and common examples used in the lecture notes.

What is taxable income?

The amount of income subject to tax, calculated as taxable revenues minus deductions.

What is book revenue (GAAP revenue)?

Revenues recorded for financial accounting under GAAP, not necessarily the same as taxable revenues.

What is book income?

GAAP net income: book revenues minus book expenses.

What is the main premise of the chapter on differences between taxable income and book income?

To explain why taxable income and book income differ, focusing on temporary differences and a four-step process to calculate taxes.

What is a temporary difference?

A difference between taxable income and book income that will reverse in a future period.

What is a permanent difference?

A difference that does not reverse; it does not create a deferred tax asset or liability.

What are DTA and DTL?

Deferred Tax Asset and Deferred Tax Liability; DTA is a future deductible amount and DTL is a future taxable amount.

What is the four-step process for handling temporary differences?

1) compute income tax payable = taxable income × tax rate; 2) determine ending balance of DTA/DTL; 3) determine the change from beginning to ending balance; 4) plug income tax expense and set up the journal entries.

If taxable income is higher than book income, what is the tax implication?

Pay more tax now and have a future deductible amount (DTA).

If book income is higher than taxable income, what is the tax implication?

Pay less tax now and have a future taxable amount (DTL).

What is a common depreciation example that creates a temporary difference?

Tax depreciation is accelerated versus straight-line book depreciation, creating a Deferred Tax Liability (DTL).

What are permanent-difference examples mentioned?

Municipal bond interest (muni bonds) and life insurance proceeds; premiums paid for life insurance are not deductible for tax purposes.

What happens to income tax expense and income tax payable when there is no DTA/DTL?

They are the same—the calculation reduces to income tax expense equal to income tax payable.

How do you calculate the effective tax rate?

Effective tax rate = income tax expense divided by book income.

What is a deferred tax asset valuation allowance?

If it’s more likely than not that part of the DTA won’t be realized, record a valuation allowance reducing the DTA.

What does a future deductible amount mean?

An amount that reduces current taxes and will be deductible in the future, creating a DTA.

What does a future taxable amount mean?

An amount that increases future taxes, creating a DTL.