Deferred Taxes

1
Deferred Taxes
2
Deferred Taxes

• Definitions
• Income taxes payable (current taxes payable)
  amount due for taxes in the current year as a
  result of filing the current years tax return
• Taxable income amount computed as subject to
  tax on the entitys tax filing
• Accounting income (pretax accounting income)
  amount reported before tax expense in the
  companys income statement

3
Deferred Taxes

• Definitions
• Permanent differences (nontemporary differences)
  transactions or events that will never affect
  the computation of taxable income (accounting
  income) but do affect accounting income (taxable
  income)
• Temporary differences transactions or events
  that are reported in taxable income in a
  different period than they are reported in
  accounting income

4
Deferred Taxes

• Definitions
• Temporary difference originate in one period
  (originating differences) and reverse in a later
  period
• Deferred tax assets arise when the originating
  difference causes taxable income to exceed
  accounting income (future deductible amount)
• Computed by multiplying the amount of the
  originating difference by the enacted rate for
  the period in which the difference will reverse

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Deferred Taxes

• Definitions
• Deferred tax liabilities arise when the
  originating difference causes accounting income
  to exceed taxable income (future taxable amount)
• Computed by multiplying the amount of the
  originating difference by the enacted rate for
  the period in which the difference will reverse
• The effect of each temporary difference is
  computed and classified separately.

6
Deferred Taxes

• Definitions
• Valuation Allowance a contraaccount which
  reduces a deferred tax asset to its estimated net
  realizable value

7
Deferred Taxes

• Definitions
• Income tax expense income taxes payable
• increase in deferred tax liabilities
• decrease in deferred tax assets
• - decrease in deferred tax liabilities
• - increase in deferred tax assets
• increase in valuation allowance
• - decrease in valuation allowance

8
Deferred Taxes

• Important items
• You must be able to reconcile taxable income with
  accounting income (temporary differences in the
  period)
• You must recompute the balances in deferred tax
  assets (including valuation allowance) and
  deferred tax liabilities whenever a new tax rate
  or tax law is enacted.

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Tax Loss Carryback/Carryforward

• This is an IRS regulation and not a GAAP
  invention
• If a company reports a net operating loss
  (negative taxable income) on its tax return, it
  may

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Tax Loss Carryback/Carryforward

1. Apply the loss against taxes paid in the previous
   two years (it will get a refund of those taxes)
2. Apply the losses against future income for up to
   the next twenty years or
3. A combination of 1 and 2

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Tax Loss Carryback/Carryforward

• The amount of tax savings as a result of the
  carryback and/or carryforward is an income tax
  benefit and it reduces the reported loss on the
  companys income statement.
• There is a requirement for a valuation allowance
  if the company will use a carryforward and the
  reported benefit must be adjusted.