This post contains a quick reference to learn accounting for income taxes. Enjoy! 

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Income Tax Expense

If taxable income [is equal with] Pretax accounting income:

  • No temporary differences
  • Income tax expense [is equal with] Current income tax expense
  • No deferred tax effect

 

If taxable income [is not equal with] Pretax accounting income:

  • Temporary differences
  • Income tax expense  [is equal with]  Current income tax expense  [plus OR minus]  Deferred income taxes

 

Current Income Tax

Current income tax expense = Taxable income x Current tax rate
Current tax liability = Current income tax expense – Estimated payments

Computing current taxable income: 
                      Pretax accounting income (financial statement income)
[plus/minus]: Permanent differences
[plus/minus]: Changes in cumulative amounts of temporary differences
[is equal]      : Current Taxable income

 

Permanent and Temporary Tax Differences [PTD and TTD]

Permanent differences:

  • Nontaxable income (interest income on municipal bonds) and nondeductible expense (premiums on officers’ life insurance)
  • No income tax effect

 

Temporary differences:

  • Carrying values of assets or liabilities  [is not equal with]  tax bases
  • May be “taxable temporary differences [TTD]” or “deductible temporary differences [DTD]”

Assets:
– Financial statement basis > tax basis = TTD
– Financial statement basis < tax basis = DTD

Liabilities:
– Financial statement basis > tax basis = DTD
– Financial statement basis < tax basis = TTD

 

Deferred Tax Assets and Liabilities

TTD × Enacted future tax rate = Deferred tax liability
DTD × Enacted future tax rate = Deferred tax asset

Selecting appropriate rate:
1)  Determine future period when temporary difference will have tax effect (period of reversal)
2)  Determine enacted tax rate for that period

 

Deferred Tax Asset Valuation Allowance

May apply to any deferred tax asset:

  • Is it more likely than not that some or all of deferred tax asset will not be realized
  • Consider tax planning strategies

 
Valuation allowance = portion of deferred tax asset that will not be realized

 

Deferred Income Tax Expense or Benefit

1)  Calculate balances of deferred tax liabilities and assets and valuation allowances
2)  Combine into single net amount
3)  Compare to combined amount at beginning of period:

  • Increase in net liability amount  =  deferred income tax expense
  • Decrease in net asset amount  =  deferred income tax expense
  • Increase in net asset amount  =  deferred income tax benefit
  • Decrease in net liability amount  =  deferred income tax benefit

 

Balance Sheet Presentation

[1]. Identify current and noncurrent deferred tax assets, liabilities, and valuation allowances
[2]. Current – TTD or DTD relates to asset or liability classified as current
[3]. Noncurrent – TTD or DTD relates to asset or liability classified as noncurrent
[4]. TTD or DTD does not relate to specific asset or liability [such as result of net operating loss carryforward] – classify as current or noncurrent depending on period of tax effect
[5]. Combine current deferred tax assets, liabilities, and valuation allowances into single amount. Report as current deferred tax asset or liability
[6]. Combine noncurrent deferred tax assets, liabilities, and valuation allowances into single amount. Report as noncurrent deferred tax asset or liability