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Assignments

Assignments. For Next Class: Read Chapter 3, pages 24-38. 3. Chapter. The Corporate Income Tax. GAAP Tax Accounting and Reconciliation from Book Income to Taxable Income . Book-Tax Differences. Contrasting principles of conservatism GAAP conservatism principle

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Assignments

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  1. Assignments • For Next Class: • Read Chapter 3, pages 24-38

  2. 3 Chapter The Corporate Income Tax

  3. GAAP Tax Accounting andReconciliation from Book Income to Taxable Income

  4. Book-Tax Differences • Contrasting principles of conservatism • GAAP conservatism principle • Protect shareholders and creditors • Curb management tendencies to overstate revenues and understate expenses for book purposes • Tax conservatism principle • Protect government revenues • Curb taxpayer tendencies to understate income and overstate deductions

  5. Book-Tax Differences • Permanent differences = items included in book income that are never recognized for tax purposes or vice versa • Temporary differences = items that are included in book income and recognized for tax purposes but in different taxable years (the difference will “reverse” over time)

  6. Book-Tax Differences – Permanent • Examples of permanent book-tax differences • Tax-exempt state and local bond interest income • Nondeductible expenses incurred to generate state and local bond interest income • Life insurance proceeds (death benefits) • Premiums on key-man life insurance • 50% of meals and entertainment • Political contributions • Fines and penalties • Bribes, kickbacks and illegal payments • Dividends-received deduction

  7. Book-Tax Differences – Temporary • Examples of temporary book-tax differences: • Depreciation versus cost recovery (and gains/losses on sales of property with different book/tax bases) • Accrued liabilities not meeting the all events and/oreconomic performance tests • Prepaid income • Related party accruals • Accrued compensation • Bad debt expense • Net operating losses • Charitable contributions in excess of limitation • Capital loss carryovers

  8. GAAP Tax Expense • GAAP total tax expense(benefit) = current tax expense (benefit) plus deferred tax expense (benefit)

  9. GAAP Tax Expense • GAAP current tax expense(benefit) = estimated tax payable (refund receivable) based on estimated taxable income for the current year • Exception: Effects of stock options compensation and “other comprehensive income” items are booked directly to retained earnings

  10. GAAP Tax Expense • GAAP deferred tax expense(benefit) = estimated tax effects of temporary differences (those differences that will reverse in future years) • Differences that make taxable income lower than book income at origination create deferred tax liabilities • Differences that make taxable income higher than book income at origination create deferred tax assets

  11. GAAP Tax Expense • GAAP (SFAS109) uses the Balance Sheet approach to calculating deferred tax expense • Calculate deferred tax liability or asset on cumulative temporary differences at the beginning of the year and again at the end of the year • Deferred tax liability increase (deferred tax asset decrease) => deferred tax expense • Deferred tax liability decrease (deferred tax asset increase) => deferred tax benefit

  12. Example 13: GAAP Tax Expense • A corporation has book income before taxes of $1,000,000. It has only two book-tax differences as follows: • The accumulated depreciation for book purposes was $350,000 at the beginning of the year and current year depreciation expense is $50,000. The accumulated MACRS was $475,000 at the beginning of the year and current year MACRS deduction is $80,000. • The total meals deducted per books was $82,000. • What is the corporation’s tax expense (current and deferred) and net book income?

  13. Example 13: GAAP Tax Expense

  14. Example 13: GAAP Tax Expense

  15. Example 13: GAAP Tax Expense

  16. GAAP Tax Expense • In simple situations: • Adjusted book income = pre-tax book income plus or minus all permanent book-tax differences • Total tax expense per books = (adjusted book income X tax rate) minus tax credits • Deferred tax expense (benefit) = total tax expense (benefit) less current tax expense (benefit) • Gives the same number as that calculated under SFAS 109 using the balance sheet approach if thetax rate does not change during the year

  17. Example 13: GAAP Tax Expense

  18. Schedules M-1 and M-3 • Corporations are required to provide, with their tax return, a reconciliation from their GAAP financial statement income to taxable income • Corporations with total assets of $10 million or more must use Schedule M-3 (requires breakdown of temporary and permanent differences) • Other corporations may use Schedule M-1 (requires breakdown by four categories)

  19. Example 13: GAAP Tax Expense

  20. GAAP Tax Expense • Example 14

  21. Problems • Chapter 3: C3-58, C3-59, and C3-61

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