August 19, 2013
Review of the Basics and Recent Developments
A S C 7 4 0 – T H E B A S I C S
Scope
Establishes standards for financial reporting of income taxes.
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Miscellaneous 1099 Issues
Presented by Jennifer A. Driskill CPA, M.B.A.
- Current tax expense (benefit) on the income statement
- Taxes payable / receivable on the balance sheet
- Taxes deferred on the balance sheet
Applies to:
- All income-based taxes:
– Domestic federal income taxes
– Foreign
– State and local - Domestic and foreign operations consolidated, combined, or accounted for by the equity method
- Foreign enterprises preparing financial statements in accordance with U.S. generally accepted accounting principles (US GAAP)
- Identifies tax positions based on technical merit that were taken in past and are to be taken in current year
- Identifies book to tax differences
A S C 7 4 0 – BO O K TO TA X DIFFERENCES
Permanent Differences
- Never expected to reverse in a future period
- Book income / expense is not recognized for tax
- Has no future tax consequences
Examples:
- Meals and entertainment
- Penalties
- Tax exempt income
- Certain dividends / Dividends Received Deduction
- Political contributions
- Lobbying Expense
- Auto-lease inclusion
- Officer’s life insurance expense
- Deferred charge basis differences
Temporary Differences
A difference between the timing of when an item of income or expense is recognized for financial statement purposes versus income tax purposes.
- Certain items included in book income recognized at a different time then they are recognized for tax purposes.
- Over time these items arise in one period and reverse in another period.
- These items will eventually offset each other.
Common Temporary Differences
- Bad debt reserve
- Depreciation
- Vacation accruals
- Reserves for estimated expenses:
– Warranty reserves
– Reserve for inventory obsolescence
– Contingent liability reserves
– State and local tax reserves
- Amortization
– Tax Deductible Goodwill
– Other intangibles
Accrued interest
- Accrual to cash conversion
How do we identify book to tax differences?
- Prior years’ tax returns
- Audited Financial Statements
- Tax workpapers
- Current year trial balance compared to prior year
- Understand balance sheet accounts - could they generate temporary differences?
- Stock compensation plan review - impact
- Discussions with client
- Current year significant events
– Transactions
– Recapitalizations
– Changes in ownership
– Refinancings
- Changes in Accounting Methods – current or prior year
D E F E R R E D TAXES
What Are They?
- Definition: The difference in book versus tax basis in an asset or liability that will reverse in time.
- Consistency: Smooth the impact of tax expense and tax benefits over time so that financials / tax rates are consistent.
What is the Liability Method?
- Tax effect of temporary differences in basis becomes either a deferred asset or a deferred liability.
- Look at the balance sheet.
Deductible differences = deferred tax assets (DTAs)
- Recognizes the deferred taxes related to taxable temporary differences
- Less tax will be paid in the future
- Creates a future tax benefit
– Asset: Book basis < tax basis (Example: bad debt reserve)
– Liability: Book basis > tax basis (Example: vacation accrual)
Examples of DTAs
Revenue items
- Advance receipts for Goods or Services (revenue deferred for book but recognized currently for tax) Expense items
- Bad Debt Reserve
- Compensation accruals (vacations, bonus)
- Contingency reserve accruals (legal, environmental
Examples of DTAs
Tax Attributes – i.e., Tax carryforward items
- Foreign tax credits
- Net operating losses
- Research credits
- AMT credit
(Caution: Consider whether need a valuation allowance)
Author: Katherine D. Morris, CPA, CohnReznick