The formula for this calculation is as follows pre

This preview shows page 62 - 64 out of 80 pages.

appropriate tax rate to arrive at the current tax provision. The formula for this calculation is as follows: Pre-tax book income +/– Schedule M-3 adjustments Taxable income before NOLs NOL carryforward Taxable income × Applicable tax rate Current tax provision before tax credits Tax credits Expected current tax expense (benefit) Example 5 EF Corp. had pretax income of $2.5 million for 2020. Pretax income included $50,000 of dividend income for which the company could take a 50% Dividends Received deduction. Also included in pretax income was the following: Financial Statements Tax Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 $ 30,000 Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,000 750,000 Contingent liability expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 0 Employee meals expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 90,000 EF’s current tax provision is calculated as follows: Pre-tax book income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500,000 Schedule M-3 adjustments: Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (75,000) Contingent liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 Employee meals expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 Dividends received deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,000 ) Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,630,000 × Tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . × 21% Current tax provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 552,300 A current provision must be calculated for federal, state, and foreign taxes. A separate cal- culation must be computed for any jurisdiction where the taxes are a material amount. State or foreign taxes should be calculated separately for each separate state or foreign tax return that must be fi led using the appropriate tax rate. Companies should prepare provisions on a state by state basis and not as a combined state calculation. A DDITIONAL I TEMS IN THE C URRENT P ROVISION In addition to the amount of tax owed for the current year, a corporation’s current tax pro- vision may include several other items including taxes due from prior year audits, certain items not included in the prior year tax accrual calculation, and changes in the amount of unrecognized tax bene fi ts. Return to Provision Adjustment It is important to identify accurately all temporary and permanent differences while prepar- ing the provision for income taxes. However, there are always items found when preparing 2021 ed.
Current Tax Provision 1-63 the tax return that were missed during the audit. It is very important that we adjust the temporary and permanent differences for any adjustments made on the tax return. This procedure is called a provision to return adjustment or “true-up” the provision. If we do not make these adjustments, the provision may be materially misstated in future years. After the corporate tax return is prepared, a comparison is performed to identify any differences between the amounts used in last year’s tax provision and the amount included for that item on the corporate tax return. The differences are adjusted as part of the tax provision preparation for the succeeding year. If the difference was created by a temporary difference, the adjustment is made to the deferred asset or liability account. If the differ- ence was created by a permanent difference, the adjustment is made to current income tax expense in the succeeding year.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture