Chapter 3_Lecture - Chapter 3 Taxes on the Financial...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 3 Taxes on the Financial Statements Book-Tax Differences 0. Significant differences may exist between a corp.'s Federal income tax liability reported on Form 1120 (tax) and the corp.’s income tax expense on financial statements (book) - Differences are caused by any or all of the following: 0. Differences in reporting entities included in the calculation 1. Different definition of taxes included in the income tax expense amount 2. Different accounting methods Different Reporting Entities 0. For book purposes: 0. For > 50% ownership, corporate group must consolidate all U.S. and foreign subs 1. For 20% to 50% ownership, parent uses the equity method to account for earnings of sub 2. For < 20% ownership, use the cost method to account for income from these investments 1. For tax purposes: 3. U.S. corporation may elect to include any domestic subsidiaries that are 80% or more owned in its consolidated U.S. tax return 0. The income of foreign subsidiaries and < 80% owned domestic subsidiaries is not included in consolidated tax return Different Taxes 1. For book purposes, income tax expense includes: 0. Federal, state, local, and foreign income taxes 1. Both current and deferred tax expense amounts 2. For tax purposes: 2. Amount is based on the U.S. corporation’s taxable income 3. State income taxes are reported on the Federal tax return, but as deductions in arriving at taxable income
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Different Methods 2. Many differences exist between book and tax accounting methods 4. Some are temporary differences 1. Income and expenses appear in both the financial statement and tax return, but in different periods 5. Others are permanent differences 2. Items appear in financial statement or tax return, but not both 3. Examples of temporary differences include: 4. Depreciation on fixed assets when MACRS is used for tax, straight-line for book 5. Compensation-related expenses where, under GAAP, corporations must accrue future expenses related to certain postretirement benefits, which are only deductible for tax purposes when paid 6. Accrued income and expenses such as warranty expenses which are accrued for book purposes, but are not deductible for tax purposes until incurred 4. Examples of temporary differences include (cont’d): 7. Net operating losses incurred in one year for book purposes may be used as a deduction for tax purposes in a different year 8. Certain intangible assets such as goodwill are not amortizable for book purposes, but for tax purposes, post-1993 intangibles are amortized over 15 years 5. Examples of permanent differences include: 9. Nontaxable income such as municipal bond interest, which is income for book purposes but is not taxable 10. Nondeductible expenses such as the disallowed portion of meals and entertainment expense and certain penalties that are not deductible for tax purposes but are expensed in arriving at book income 11. Tax credits s
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/23/2010 for the course ACC 410 taught by Professor Su during the Spring '10 term at University of Nevada, Las Vegas.

Page1 / 8

Chapter 3_Lecture - Chapter 3 Taxes on the Financial...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online