Deferred TaxesDeferred Taxes

Deferred TaxesDeferred Taxes

DefinitionsDefinitionsIncome taxes payable (current taxes Income taxes payable (current taxes

payable) – amount due for taxes in the payable) – amount due for taxes in the current year as a result of filing the current current year as a result of filing the current year’s tax return year’s tax return

Taxable income – amount computed as Taxable income – amount computed as subject to tax on the entity’s tax filingsubject to tax on the entity’s tax filing

Accounting income (pretax accounting Accounting income (pretax accounting income) – amount reported before tax income) – amount reported before tax expense in the company’s income statementexpense in the company’s income statement

Deferred TaxesDeferred Taxes

DefinitionsDefinitionsPermanent differences (nontemporary Permanent differences (nontemporary

differences) – transactions or events differences) – transactions or events that will never affect the computation of that will never affect the computation of taxable income (accounting income) but taxable income (accounting income) but do affect accounting income (taxable do affect accounting income (taxable income) income)

Temporary differences – transactions or Temporary differences – transactions or events that are reported in taxable events that are reported in taxable income in a different period than they income in a different period than they are reported in accounting incomeare reported in accounting income

Deferred TaxesDeferred Taxes

DefinitionsDefinitionsTemporary difference originate in one Temporary difference originate in one

period (originating differences) and period (originating differences) and reverse in a later periodreverse in a later period

Deferred tax assets – arise when the Deferred tax assets – arise when the originating difference causes taxable originating difference causes taxable income to exceed accounting income income to exceed accounting income ((future deductible amountfuture deductible amount))Computed by multiplying the amount of the Computed by multiplying the amount of the

originating difference by the enacted rate for originating difference by the enacted rate for the period in which the difference will reversethe period in which the difference will reverse

Deferred TaxesDeferred Taxes

DefinitionsDefinitionsDeferred tax liabilities – arise when the Deferred tax liabilities – arise when the

originating difference causes accounting originating difference causes accounting income to exceed taxable income (income to exceed taxable income (future future taxable amounttaxable amount))Computed by multiplying the amount of the Computed by multiplying the amount of the

originating difference by the enacted rate for originating difference by the enacted rate for the period in which the difference will reversethe period in which the difference will reverse

The effect of each temporary difference is The effect of each temporary difference is computed and classified separately.computed and classified separately.

Deferred TaxesDeferred Taxes

DefinitionsDefinitionsValuation Allowance – a contraaccount Valuation Allowance – a contraaccount

which reduces a deferred tax asset to its which reduces a deferred tax asset to its estimated net realizable value estimated net realizable value

Deferred TaxesDeferred Taxes

DefinitionsDefinitionsIncome tax expense = income taxes Income tax expense = income taxes

payablepayable + increase in deferred tax liabilities + increase in deferred tax liabilities + decrease in deferred tax assets+ decrease in deferred tax assets - decrease in deferred tax liabilities- decrease in deferred tax liabilities - increase in deferred tax assets- increase in deferred tax assets + increase in valuation allowance+ increase in valuation allowance - decrease in valuation allowance- decrease in valuation allowance

Deferred TaxesDeferred Taxes

Important itemsImportant itemsYou must be able to reconcile taxable You must be able to reconcile taxable

income with accounting income income with accounting income (temporary differences in the period)(temporary differences in the period)

You must recompute the balances in You must recompute the balances in deferred tax assets (including valuation deferred tax assets (including valuation allowance) and deferred tax liabilities allowance) and deferred tax liabilities whenever a new tax rate or tax law is whenever a new tax rate or tax law is enacted.enacted.

Tax Loss Tax Loss Carryback/CarryforwardCarryback/Carryforward

This is an IRS regulation and not a This is an IRS regulation and not a GAAP inventionGAAP invention

If a company reports a net If a company reports a net operating loss (negative taxable operating loss (negative taxable income) on its tax return, it may:income) on its tax return, it may:

Tax Loss Tax Loss Carryback/CarryforwardCarryback/Carryforward

1.1. Apply the loss against taxes paid in Apply the loss against taxes paid in the previous two years (it will get a the previous two years (it will get a refund of those taxes);refund of those taxes);

2.2. Apply the losses against future Apply the losses against future income for up to the next twenty income for up to the next twenty years; oryears; or

3.3. A combination of 1 and 2A combination of 1 and 2

Tax Loss Tax Loss Carryback/CarryforwardCarryback/Carryforward

The amount of tax savings as a result The amount of tax savings as a result of the carryback and/or carryforward of the carryback and/or carryforward is an income tax benefit and it is an income tax benefit and it reduces the reported loss on the reduces the reported loss on the company’s income statement.company’s income statement.

There is a requirement for a There is a requirement for a valuation allowance if the company valuation allowance if the company will use a carryforward and the will use a carryforward and the reported benefit must be adjusted.reported benefit must be adjusted.