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Unformatted text preview: 990 C H A P T E R 19 ACCOUNTING FOR INCOME TAXES LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify differences between pretax financial income and taxable income. Describe a temporary difference that results in future taxable amounts. Describe a temporary difference that results in future deductible amounts. Explain the purpose of a deferred tax asset valuation allowance. Describe the presentation of income tax expense in the income statement. Describe various temporary and permanent differences. Explain the effect of various tax rates and tax rate changes on deferred income taxes. Apply accounting procedures for a loss carryback and a loss carryforward. Describe the presentation of deferred income taxes in financial statements. Indicate the basic principles of the asset-liability method. • 10 • 9 • 8 • 7 • 6 • 5 • 4 • 3 • 2 • 1 One set of costs that companies manage are those related to taxes. In fact, in today’s competitive markets, managers are expected to look for places in the tax code that a company can exploit to pay less tax to state and federal gov- ernments. By paying less in taxes, companies have more cash available to fund operations, finance expansion, and create new jobs. What happens, though, when companies push the tax-saving envelope? Well, they may face a tax audit, the results of which could hurt their financial statements. A notable example of corporate maneuvering to reduce taxable income involved Limited Brands Inc. It managed state-tax costs downward by locating part of its business in low-tax-rate states while operating retail outlets elsewhere. For example, by basing a subsidiary (which does nothing more than hold the trademarks for Bath and Body Works and Victoria’s Secret) in Delaware, it is able to transfer hundreds of millions of dollars from Limited’s retail outlets in high-tax states into Delaware, which has a state tax rate of zero. However, the IRS and some states have been increasing their scrutiny of transactions that seem done only to avoid taxes and that do not serve a legitimate business purpose. In Tax Uncertainty PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark one case, an attorney for North Carolina alleged that Limited Brands Inc. “. . . engaged in hocus pocus bookkeeping and deceptive accounting,” the sole purpose of which was to reduce its state-tax bill. The court agreed, and Limited Inc. had to pay millions of dollars in taxes dating back to 1994. Limited Brands shareholders likely got an unpleasant surprise when they learned the company also had a big tax obligation from its “uncertain tax position” related to off-shore locations. The same can be said for many other com- panies that take tax deductions that may not hold up under the scrutiny of the tax court or an IRS audit. Unfortunately, at the time, accounting rules were not very specific on when companies had to record an obligation for taxes owed on...
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This note was uploaded on 01/16/2011 for the course AIM 6330 taught by Professor Volkanmuslu during the Fall '10 term at University of Texas at Dallas, Richardson.
- Fall '10
- The Hours