Income Taxes Study Notes

Income Taxes Overview

• Tax Expense Components
  • Tax expense = Current Tax Expense + Deferred Tax Expense

Income Tax Basics

• Income Tax - Understanding the Big Picture
  • Taxable Income vs. Accounting Profit
  • Adjusted for different tax treatments
  • Two types of differences:
  • Temporary Differences
  • Non-Temporary Differences

Current Tax

• Definition: Recognizes the tax due for the current year based on taxable income.
• Calculation:
  • Current Tax = Taxable Income × Tax Rate

Calculation Example of Current Tax

• Starting Point:
  • Accounting profit before tax: $300,000$
  • Add Accounting Depreciation: 80,000 imes 20 ext{ ext{%}} = 16,000
  • Less Tax Depreciation: 80,000 imes 25 ext{ ext{%}} = (20,000)
  • Add Income in Advance: $3,000$
  • Add Fines: $5,000$
  • Add Non-Deductible Expense: $5,000$
  • Taxable Profit: $309,000$
  • Tax Rate: 30 ext{ ext{%}}
  • Current Tax: 309,000 imes 30 ext{ ext{%}} = 92,700

Journal Entry for Current Tax

• Date: 30/6/21
  • Debit: Current Income Tax Expense: $92,700$
  • Credit: Current Tax Liability: $92,700$

Deferred Tax

• Definition: Arises from timing differences between accounting profit and taxable profit, leading to deferred tax liability (DTL) or asset (DTA).
• Temporary Differences:
  • E.g. Differences in accounting vs tax depreciation

Accounting vs Tax Treatments

• Differences examples:
  • Employee Benefits: Liability in accounting; TD when paid for tax
  • Prepaid Expenses: Asset when prepaid; TD when paid for tax
  • Fines and Penalties: Recognized as expenses; not deductible for tax
  • Depreciation: Accounting expenses based on useful life; TD based on tax rates

Deferred Tax Calculation Steps

1. Determine Tax Base of assets/liabilities
2. Compare Tax Base with Carrying Amount
   • Identify taxable/ deductible temporary differences
3. Measure DTAs and DTLs
4. Recognize DTAs and DTLs considering exceptions

Examples of Deferred Tax Calculation

• Example - Asset:
  • Cost: $120,000$
  • Accounting Depreciation: $24,000$
  • Tax Depreciation: $30,000$
  • Temporary Difference: $96,000 - 90,000 = 6,000$
  • DTL: 6,000 imes 30 ext{ ext{%}} = 1,800

Deferred Tax Liabilities Journal Entry

• Date: 31/12/20X1
  • Debit: Deferred Tax Expense: $1,800$
  • Credit: Deferred Tax Liability: $1,800$

Tax Base of Income in Advance

• Definition: Carrying Amount - Income not taxed in future
• Example: Interest revenue of $50$ taxed when received leads to tax base of $0$

Recognition of Tax Loss

• Tax Loss Reduction: Reduces future taxable income.
• DTA Calculation: DTA = Tax Loss × Tax Rate

Revaluation of Assets

• General Rule: OCI recognition for tax items related to OCI.
• Recovery Method:
  • Through use vs. through sale

Presentation and Disclosure of Income Tax

• Current tax asset and liability can be presented as a single net amount in financial statements.