Nashville State Community College
Chapter 16 - Accounting for Income TaxesTemporary DifferencesAlso known as timing differences. Due to differences in revenue and expense recognition for accounting vs. tax reporting.Future taxable amount (revenue earned for financial accounting purposes but deferred for tax accounting purposes or vice versa).Future deductible amount (expense incurred for financial accounting purposes but deferred for tax accounting purposes or vice versa).With temporary differences, the total amount of income recognized will be the same over the affected periods.No tax is avoided due to temporary differences.Income tax expense is comprised of two componentsAmount currently payableAmount deferred until laterDeferred Tax AssetExpenses or losses reported on the tax return after the income statementRevenue or gains reported on the tax return before the income statementDesired balance is reported (adjusted for any previous amount remaining in account)Deferred Tax LiabilityExpenses or losses reported on the tax return before the income statementRevenue or gains reported on the tax return after the income statementDesired balance is reported (adjusted for any previous amount remaining in account)Income Statement ReportingNet income is reduced by the reported amount for Income Tax Expense Permanent DifferencesCaused by transactions and events that under existing tax law will never affect taxable income or income tax expense.Disregarded when determining income tax payableLoss Carryback/CarryforwardAn operating loss occurs when expenses exceed revenuesNo income tax is due on losses (only earnings are taxed)Tax laws permit companies to use operating losses to offset income in prior or future yearsLoss carryback may be applied to income of the two previous years (beginning with the earlier of the two prior years)Loss carryforward may be applied up to 20 yearsIf a loss carryback is used, the company is due a tax refund and records a Tax Refund ReceivableIf a loss carryback in not used up against income from the prior two years, it may be carried forwardAny benefit from a loss carryforward is debited to Deferred Tax AssetThe income tax benefit reduces the current period net loss ................
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