Deferred taxes - Accounting for Income Taxes Items to be...

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© 1999 by Robert F. Halsey Accounting for Income Taxes Accounting for Income Taxes Items to be covered Deferred taxes Temporary vs. permanent differences deferred tax liabilities deferred tax assets valuation allowance presentation in financial statements future tax rates different from present Loss carrybacks/carryforward Intraperiod tax allocation Some issues/controversies
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© 1999 by Robert F. Halsey The Internal Revenue Code which governs the accounting for tax liability is not the same as GAAP which governs financial reporting. As a result, » taxable income reported to the IRS (using cash basis accounting) may not be the same as pre-tax profit that is reported to shareholders (using accrual accounting). » The amount of tax liability due to the IRS may not be the same as income tax expense that is reported on the income statement. Some general observations: Some general observations:
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© 1999 by Robert F. Halsey We, therefore, speak of “book income” (meaning income reported to shareholders) and “tax income” (income reported to the IRS). There may be Temporary differences between the two. That is, book income may be higher than tax income this year, but will be lower in a future year so that cumulative profit will be the same for both. Or there may be Permanent differences between the two (e.g., the difference will not reverse) This is due to GAAP treating some items as income or expenses that the IRS does not, like municipal bond income that is treated as revenue under GAAP, but is not taxed by the IRS.
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© 1999 by Robert F. Halsey As an example of the differences between book and tax income, consider a company that depreciates its assets using the straight- line method for financial reporting purposes and an accelerated method for tax purposes. This is typical for most companies. Assume that income before depreciation is $15,000. Pre-tax (financial reporting) and taxable (IRS) income might be reported as follows: Taxable income is lower than pre-tax income. We know, however, that over the life of the asset the same amount of depreciation expense will be reported under both methods. As a result, taxable income will be higher in future years and tax liability as well.
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© 1999 by Robert F. Halsey We know in the first year of the asset’s life that taxable
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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.

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Deferred taxes - Accounting for Income Taxes Items to be...

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