ACCOUNTING FOR INCOME TAX

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ACCOUNTING FOR INCOME TAX
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Timing Differences

• Occurs when the amount you record on the income
  statement is different than what you record on
  Form 1020 Corporate Tax Return
• Deferred not avoided
• Client situation with IRA withdrawal

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Two Types pg 826

• Liability
• Deferred Tax Liability
• Taxes yet to be paid
• Asset
• Deferred Tax Asset
• Prepaid taxes

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Liability Page 1

• Revenue income reporting delayed on tax return
  (Less taxable income)
• Installment Sales
• Total Sale recorded on income statement
• Record income based on amount of cash received
• Market Value Adjustment
• Adjustment recorded on income statement
• Record added value when asset is sold

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Liability page 2

• Expenses expense reporting delayed on tax
  return (less taxable income)
• Depreciation
• record low depr (SL) on income statement
• Must use ACRS on tax return
• Prepaid expenses
• record full amount paid on tax return
• but only amount used on income statement

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DEFERRED TAX LIABILITY

• BE 16-1
• Journal Entry
• Income Tax Expense (income statement incometax
  rate)
• Deferred tax liability (deferred
  tax rate)
• Income Tax Payable (tax return
  incometax rate)

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Asset page 1

• Revenues recorded on tax return not on income
  statement (increase taxable income)
• Unearned Revenue
• Annual Subscriptions as asset
• Annual subscription recorded as income on tax
  return

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Assets page 2

• Expenses Not on tax return but on income
  statement (increase taxable income)
• Estimated expenses such as vacation pay
  liability, coupon expenses, warranty expense
• recorded on income statement
• Recorded on tax return when actually used

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Deferred Tax Asset

• BE 16-2, 16-3
• Journal Entry
• Income Tax Expense (income statement incometax
  rate)
• Deferred tax asset (deferred tax rate)
• Income Tax Payable (tax return
  incometax rate)

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Deferred Tax Liability

• 09 10
  11 Total
• Net Income 300 200 200
  700
• Tax Diff. (100)
  70 30 -0-
• Tax Income 200 270
  230 700
• Income Tax X 96(30032)
  64(20032) 64(20032)
• Income Tax Pay 64(20032)
  86.4(27032) 73.6(23032)
• Deferred Tax Liab. 32(10032)
  22.4(7032) 9.6(32-22.4)

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• Deferred Tax Liability_____
• !
  32000
• 22,400 !
• 9,600 !
• If you have a lot of deferred items you should
  have a subsidiary ledger by year to show when
  each deferred item is completely recouped.

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Deferred Tax Asset

• 09 10
  11 12
• Net Income 500 550 550
  550
• Tax Diff. 150
  (50) (50) (50)
• Tax Income 650 500
  500 500
• Income Tax X 150(50030)
  165(55030) 165 165
• Income Tax Pay 195(65030)
  150(27032) 150 150
• Deferred Tax Asset 45(15030)
  15(5030) 15 15

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Temporary difference examples

• BE 16-9 Depreciation adjustment
• BE 16-10 Warranty expense and tax change