Corporate Income Tax
Learn Accounting for Income Taxes in 1 Minute
This post contains a quick reference to learn accounting for income taxes. Enjoy!
Income Tax Expense
If taxable income [is equal with] Pretax accounting income:
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- 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