deferred tax

Examples of deferred tax in the following topics:

• Overview of Income Tax Accounting

  • Also, the actual amount of tax liability due to the IRS may not be the same as the income tax expense reported on the income statement.
  • In this method, the deferred income tax amount is based on tax rates in effect when the temporary differences originated.
  • The deferred method is an income-statement-oriented approach.
  • In the asset-liability method, deferred income tax amount is based on the expected tax rates for the periods in which the temporary differences reverse.
  • Summarize how to account for deferred taxes under the deferred method and the asset-liability method

• Other Current Liabilities: Sales Tax, Income Tax, Payroll, and Customer Advances

  • Other current liabilities reported on the balance sheet are sales tax, income tax, payroll, and customer advances (deferred revenue).
  • If the book-tax difference is carried over more than a year, it is referred to as a deferred tax.
  • Future assets and liabilities created by a deferred tax are reported on the balance sheet.
  • The receipt of $12,000 for the annual maintenance contract is initially recorded as deferred revenue.
  • Explain how sales tax payable, income tax payable, salaries and wages payable and deferred revenue appear on the financial statements

• Effects of GAAP on the Income Statement

  • Although most of the information on a company's income tax return comes from the income statement, there often is a difference between pretax income and taxable income.
  • These differences are due to the recording requirements of GAAP for financial accounting (usually following the matching principle and allowing for accruals of revenue and expenses) and the requirements of the IRS's tax regulations for tax accounting (which are more oriented to cash).
  • Such timing differences between financial accounting and tax accounting create temporary differences.
  • For example, rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets may create timing differences.

• Unearned and Deferred Revenues

  • Examples of deferred items include annuities, charges, taxes, income, etc.
  • If the deferred item relates to revenue (cash has been received), it is carried as a liability.
  • An example of a deferred revenue is the monies received for a 12-month magazine subscription.
  • A deferred revenue item involves cash received before the earnings process is complete.
  • Explain the purpose of classifying transactions as either deferred or unearned revenue

• Other Expenses

  • Other expenses include SG&A, depreciation, amortization, R&D, finance costs, income tax expense, discontinued operations expenses.
  • Administrative expenses - executive salaries, general support, and all associated taxes related to the overall administration of the company.
  • Such expense is recognized by businesses for financial reporting and tax purposes.
  • Methods and lives may be specified in accounting and/or tax rules in a country.
  • Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets).

• Sample Income Statement

  • 'Revenue' is money received from the sales of products and services before expenses are deducted, also called the 'top line. ' The net income is the result after all revenues and expenses have been accounted for, also known as the 'net profit' or the 'bottom line. ' The income statement displays the revenues recognized for a specified period and the expenses charged against these revenues, including write-offs (depreciation and amortization of assets) and taxes.
  • When combined with 'income from operations,' this yields 'income before taxes. ' The final step is to deduct taxes, which finally produces the net income for the period measured.
  • Income tax expense: Sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/tax payable) and the amount of deferred tax liabilities or assets.
  • They are reported net of taxes.

• Differences Between Accrued and Deferred Expenses

  • Accrued and deferred expenses represent the two possibilities that can occur due to timing differences under the matching principle.
  • A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred.
  • Deferred expense is generally associated with service contracts that require payment in advance.
  • So the business will record a $12,000 deferred expense asset.
  • Accrued and deferred expenses are both listed on a company's balance sheet.

• The LIFO Reserve

  • This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
  • Suppose a company uses FIFO for its internal accounting system, but wants to use LIFO for financial and income tax reporting (due to continuous inflation of its costs).
  • The change in the balance of the LIFO reserve during the current year times the income tax rate results in the difference in the income tax for the year.
  • Changing this formula slightly, one can find the difference in income tax since LIFO was adopted (the balance in the LIFO reserve times the income tax rate).

• Cost of Goods Sold and Gross Profit

  • Note that this is different from operating profit (earnings before interest and taxes).
  • Net income (or Net profit) = Operating profit – taxes – interest
  • The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.

• Principles of Freedom

  • While the roots of democracy were apparent, nevertheless, deference was typically shown to social elites in colonial elections.
  • That deference declined sharply with the American Revolution.
  • Civic duty: citizens have the responsibility to understand and support the government, participate in elections, pay taxes, and perform military service.