1. Welcome Back
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2. Welcome Back
Time for Any Question
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3. CHAPTER # 16
REVIEW
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4. Chapter 16
Corporate Operations
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5. Corporate Taxable Income Formula
Gross Income –
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6. Corporate Taxable Income Formula
Gross Income – Deductions =
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7. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X
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8. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X Tax Rates =
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9. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities +
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10. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes =
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11. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Total Taxes –
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12. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Total Taxes – Credits –
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13. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Total Taxes – Credits – Prepayments =
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14. Corporate Taxable Income Formula
Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Total Taxes – Credits – Prepayments = Tax Due/Refund
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15. Book-Tax Adjustments
Financial income typically is the starting point for computing taxable income
Reconcile to taxable income
Book-tax adjustments for differences between financial accounting rules
Companies preparing financial statements with tax accounting methods won’t have book-tax differences
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16. Book-Tax Adjustments Unfavorable Adjustments:
Add back to book income to compute taxable income
Favorable Adjustments:
Subtract from book income to compute taxable income
Permanent differences
Temporary differences
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17. Common Permanent Book-Tax Differences
Interest income from municipal bonds
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18. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees
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19. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums
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20. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums (UnFav)
Half of meals and entertainment expense
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21. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums (UnFav)
Half of meals and entertainment expense (UnFav)
Fines and penalties and political contributions
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22. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums (UnFav)
Half of meals and entertainment expense (UnFav)
Fines and penalties and political contributions (UnFav)
Excess compensation to executives
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23. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums (UnFav)
Half of meals and entertainment expense (UnFav)
Fines and penalties and political contributions (UnFav)
Excess compensation to executives (UnFav)
Federal income taxes
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24. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums (UnFav)
Half of meals and entertainment expense (UnFav)
Fines and penalties and political contributions (UnFav)
Excess compensation to executives (UnFav)
Federal income taxes (UnFav)
Dividends received deduction
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25. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums (UnFav)
Half of meals and entertainment expense (UnFav)
Fines and penalties and political contributions (UnFav)
Excess compensation to executives (UnFav)
Federal income taxes (UnFav)
Dividends received deduction (Fav)
Domestic manufacturing deduction
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26. Common Permanent Book-Tax Differences
Interest income from municipal bonds (Fav)
Death benefit from life insurance on key employees (Fav)
Life insurance premiums (UnFav)
Half of meals and entertainment expense (UnFav)
Fines and penalties and political contributions (UnFav)
Excess compensation to executives (UnFav)
Federal income taxes (UnFav)
Dividends received deduction (Fav)
Domestic manufacturing deduction (Fav)
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27. Common Temporary Book-Tax Differences
Dividends
Depreciation
Gain/loss on sale of depreciable asset
Bad debt expense
§263A uniform inventory capitalization costs
Organizational or start-up costs
Unearned rent revenue
Deferred compensation
Stock options
Net capital loss
Carry back three years and forward five years
Net operating loss carryover
Goodwill acquired in an asset acquisition
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28. Stock Option Example 1
On January 1, 2016, PCC granted 20,000 nonqualified options with an estimated $5 value per option ($100,000 total value). Each option entitled the owner to purchase one share of PCC stock for $15 a share (the per share price of PCC stock on January 1, 2016, when the options were granted). The options vested at the end of the day on December 31, 2016 (employees could not exercise options in 2016). What is PCC’s book-tax difference associated with the nonqualified options in 2016? Is the difference favorable or unfavorable? Is it permanent or temporary?
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29. Stock Option Example 1 Solution
Answer: $100,000 unfavorable, temporary book-tax difference. PCC amortizes the compensation expense ratably over the vesting period (2016). PCC expenses $100,000 for book purposes in 2016 and reports a $0 compensation deduction for tax purposes (the options were not exercised).
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30. Stock Option Example 2
Assume the same facts in Example 1 and that on March 1, 2017, employees exercised all 20,000 options at a time when the PCC stock was trading at $20 per share. What is PCC’s book-tax difference associated with the stock options in 2017? Is it a permanent difference or a temporary difference? Is it favorable or unfavorable?
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31. Stock Option Example 2 Solution
Answer: $100,000 favorable, temporary book-tax difference in The favorable book-tax difference is a complete reversal of the unfavorable book-tax difference in The 2016 and 2017 book-tax differences completely offset each other because the estimated value of $5 per option is equal to the bargain element ($20 FMV minus $15 exercise price per share).
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32. Stock Option Example 3
Assume that on March 1, 2017, employees exercised all 20,000 options at a time when the PCC stock was trading at $24 per share. What is PCC’s book-tax difference associated with the stock options in 2017? Is it a permanent difference or a temporary difference? Is it favorable or unfavorable?
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33. Stock Option Example 3 Solution
Answer: $180,000 favorable book-tax difference in The $180,000 difference consists of a $100,000 favorable, temporary difference (the reversal of the prior year unfavorable, temporary difference) and an $80,000 permanent, favorable difference. The permanent difference is the bargain element on the 20,000 options in excess of the estimated value of the options for book purposes [($24 − $20) × 20,000 options].
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34. Net Capital Losses
No current deduction for net capital losses (capital losses in excess of capital gains)
Carry back net capital losses three years and carry forward five years.
Use carryover amounts on FIFO basis
Unfavorable, temporary book-tax difference in year of net capital loss
Favorable, temporary book-tax difference in year carryback or carryover is utilized
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35. Net Operating Loss Deduction
No current benefit from current year loss (NOL)
Carry NOL back two years and forward 20 to offset taxable income in those years
May elect to forgo carry back
Why would a corporation do this?
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36. NOL Example
XYZ Inc. has a net operating loss of $20,000 for the 2016 tax year. XYZ reported the following taxable income from 2013 through 2015:
2013: $10,000
2014: $17,000
2015: $8,000
What options does XYZ have with respect to the current year NOL?
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37. NOL Example Solution
Could carry back $17,000 to 2014, then $3,000 to 2015.
Immediate refund (file Form 1139)
Or, could forgo carryback and carry loss forward 20 years
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38. Charitable Contributions
Deduction limited to 10% of taxable income before deducting
Any charitable contribution deduction
The dividends received deduction (DRD)
NOL carrybacks
Domestic production activities deduction (DPAD)
Capital loss carrybacks
Carry forward excess contributions for five years
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39. Dividends Received Deduction
Deduction to mitigate more than two levels of tax
Own less than 20%: 70% DRD
Own at least 20% but less than 80%: 80% DRD
Own 80% or more: 100% DRD
Limitation: Deduction is limited to the lesser of
(1) Dividend × DRD % or
(2) DRD modified taxable income × DRD %
Modified taxable income = taxable income before DRD, any NOL, DPAD, and capital loss carrybacks
If full DRD extends or creates NOL, this limit does not apply
Creates favorable, permanent book-tax difference
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40. Regular Tax Liability Marginal tax rates range from 15% to 39%.
Larger corporations generally pay flat 34% or 35% rate
Controlled groups
Group of corporations treated as one for determining certain tax benefits
Parent-Subsidiary
Brother-Sister
Combined
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41. Compliance Corporations report taxable income on Form 1120.
Small corporations complete Schedule M-1
Large corporations complete Schedule M-3
Book-tax differences referred to as M adjustments
Corporate returns are due 3½ months after the close of the tax year (June 30 year-end exception).
Automatic six month extension for filing (10/15 for calendar year)
Consolidated tax returns
Affiliated groups essentially treated as one corporation
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42. Form 1120 Schedule M-1
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43. Estimated Payments
Corporations with a federal income tax liability of $500 or more are required to pay their estimated income tax in four monthly installments.
Installments due on the 15th day of:
4th month (25% of required annual payment)
6th month (50% of required annual payment)
9th month (75% of required annual payment)
12th month (100% of required annual payment)
Corporations may owe a penalty for underpayment
Payments based on required annual payment
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44. Alternative Minimum Tax
Tax paid in addition to regular tax liability
Does not apply to small corporations
Average annual gross receipts < $7.5 million for three years prior to current taxable year
Once fail small corporation test, subject to AMT for all subsequent years
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45. Alternative Minimum Tax Formula
Taxable income (before NOL DED) +
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46. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +-
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47. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments =
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48. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +-
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49. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment –
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50. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction =
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51. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI -
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52. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption =
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53. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X
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54. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X 20% =
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55. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X 20% = Gross AMT –
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56. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X 20% = Gross AMT – AMT Foreign Tax Credit =
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57. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X 20% = Gross AMT – AMT Foreign Tax Credit = TMT –
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58. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X 20% = Gross AMT – AMT Foreign Tax Credit = TMT – Regular Tax =
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59. Alternative Minimum Tax Formula
Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X 20% = Gross AMT – AMT Foreign Tax Credit = TMT – Regular Tax = AMT
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60. Accounting for Tax Income
Chapter 17
Accounting for Tax Income
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61. Learning Objectives
Explain the objectives behind FASB ASC Topic 740, Accounting for Income Taxes, and the income tax provision process.
Calculate the current and deferred income tax expense or benefit components of a company’s income tax provision.
Recall what a valuation allowance represents and describe the process by which it is determined.
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62. Learning Objectives (cont.)
Explain how a company accounts for its uncertain income tax positions under ASC (a codification of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes).
Recognize the different components of a company’s disclosure of its income tax accounts in the financial statements and footnotes and comprehend how a company computes and discloses the components of its “effective tax rate.”
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63. Break for Minutes
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64. Objectives of “Accounting for Income Taxes”
The income tax provision includes
Current year taxes payable or refundable
Any changes to future income taxes payable or refundable that result from differences in the timing of when an item is reported on the tax return compared to the financial statement
A company records these future income taxes payable or refundable on its balance sheet as
Deferred tax liability
Deferred tax asset
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65. Objectives of “Accounting for Income Taxes”
Objectives of ASC 740
ASC 740 applies only to:
Income taxes levied by the U.S. federal government
U.S. state and local governments
Non-U.S. (“foreign”) governments
The FASB defines an income tax as a tax based on income, which excludes property taxes, excise taxes, sales taxes, and value-added taxes.
Companies report non-income taxes as expenses in the computation of their net income before taxes
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66. Objectives of “Accounting for Income Taxes”
Two objectives
Recognize the amount of income taxes payable or refundable in the current year
Recognize deferred tax liabilities and assets for the (expected) future tax consequences of events that have been recognized in an enterprise’s financial statements or tax returns
Both objectives relate to reporting a company’s income tax amounts on the balance sheet, not the income statement
Asset and liability approach
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67. Objectives of “Accounting for Income Taxes”
A “book-tax” difference can occur for several reasons:
1) Different accounting methods are used in the computation.
Straight-line depreciation is used for book, accelerated depreciation is used for tax.
2) The book-tax “rules” are different.
Not all book income is taxable.
Not all book deductions reduce taxable income.
Not all tax deductions reduce book income.
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68. Objectives of “Accounting for Income Taxes”
3) The timing of when income and deductions are reported on the two statements may differ (prepayments).
4) Different entities may appear on the two statements.
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69. Objectives of “Accounting for Income Taxes”
To compute the deferred tax liability or asset, a company must calculate the future tax effects attributable to temporary differences and tax carry forwards
Temporary differences that are initially favorable (unfavorable) create deferred tax liabilities (assets)
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70. Objectives of “Accounting for Income Taxes” and Income Tax Provision Process
Steps in determining the income tax provision
Adjust pretax income for permanent differences
Identify all temporary differences and carryforwards
Calculate the current income tax expense or benefit
Recognize deferred tax assets and liabilities
Evaluate the need for a valuation allowance for deferred tax assets
Calculate the deferred income tax expense or benefit
Determine changes to liabilities for uncertain tax positions
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71. Objectives of “Accounting for Income Taxes” and Income Tax Provision Process
Compute the two components of the income tax provision
Current
Deferred
Combine the two components to produce the total income tax provision
Formula
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72. Calculate Current and Deferred Income Tax Expense or Benefit Component
1) Adjust Pretax Net Income for All Permanent Differences
Permanent differences - Differences that appear only on the income statement or tax return, but not on both
A company does not take permanent differences into account in computing its deferred tax assets and liabilities
Permanent differences usually affect a company’s effective tax rate and appear as part of its reconciliation of its effective tax rate with the statutory U.S. tax rate
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73. Calculate Current and Deferred Income Tax Expense or Benefit Component
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74. Calculate Current and Deferred Income Tax Expense or Benefit Component
2) Identify All Temporary Differences and Tax Carryforward Amounts
Temporary differences commonly arise in four instances
Revenues or Gains that are taxable after they are recognized in Financial Income
Expenses or Losses that are deductible after they are recognized in Financial Income
Revenues or Gains that are taxable before they are recognized in Financial Income
Expenses or Losses that are deductible before they are recognized in Financial Income
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75. Calculate Current and Deferred Income Tax Expense or Benefit Component
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76. Calculate Current and Deferred Income Tax Expense or Benefit Component
Identifying Taxable and Deductible Temporary Differences
Taxable Temporary Difference
Initially favorable gives rise to a taxable temporary difference
Taxable temporary differences generally arise when
Revenues or gains are taxable after they are recognized in net income
Expenses or losses are deductible on the tax return before they reduce net income
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77. Calculate Current and Deferred Income Tax Expense or Benefit Component
From a balance sheet perspective
A taxable temporary difference generally arises when the financial reporting basis of an asset exceeds its corresponding tax basis, or the financial reporting basis of a liability is less than its corresponding tax basis
The future tax cost associated with a taxable temporary difference is recorded on the balance sheet as a deferred tax liability
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78. Calculate Current and Deferred Income Tax Expense or Benefit Component
Deductible Temporary Difference
A temporary difference that initially is unfavorable gives rise to a deductible temporary difference
Deductible temporary differences generally arise when
Revenues or gains are taxable before they are recognized in net income
Expenses or losses are deductible on the tax return after they reduce net income
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79. Calculate Current and Deferred Income Tax Expense or Benefit Component
From a balance sheet perspective
A deductible temporary difference generally arises when the financial reporting basis of an asset is less than its corresponding tax basis or the financial reporting basis of a liability exceeds its corresponding tax basis
The future tax benefit associated with a deductible temporary difference is recorded on the balance sheet as a deferred tax asset
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80. Calculate Current and Deferred Income Tax Expense or Benefit Component
3) Compute the Current Income Tax Expense or Benefit
ASC 740 defines the current income tax expense or benefit as “The amount of income taxes paid or payable (or refundable) for a year as determined by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues for that year”
The major component of a company’s current income tax expense or benefit is
income tax liability or
refund from its current year operations
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81. The Current Tax Provision Example
Green, Inc. computed its pretax book income to be $1,000. Green identified the following four book/tax differences that it will report on Schedule M-1 when it files Form 1120 later in the year.
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82. The Current Tax Provision Example
Green, Inc. computed its pretax book income to be $1,000. Green identified the following four book/tax differences that it will report on Schedule M-1 when it files Form 1120 later in the year.
Tax-exempt interest income (book, not tax) 50
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83. The Current Tax Provision Example
Green, Inc. computed its pretax book income to be $1,000. Green identified the following four book/tax differences that it will report on Schedule M-1 when it files Form 1120 later in the year.
Tax-exempt interest income (book, not tax) P
Accrued warranty (book, not tax) (200)
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84. The Current Tax Provision Example
Green, Inc. computed its pretax book income to be $1,000. Green identified the following four book/tax differences that it will report on Schedule M-1 when it files Form 1120 later in the year.
Tax-exempt interest income (book, not tax) P
Accrued warranty (book, not tax) (200) T
Nondeductible fine (book, not tax) (150)
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85. The Current Tax Provision Example
Green, Inc. computed its pretax book income to be $1,000. Green identified the following four book/tax differences that it will report on Schedule M-1 when it files Form 1120 later in the year.
Tax-exempt interest income (book, not tax) P
Accrued warranty (book, not tax) (200) T
Nondeductible fine (book, not tax) (150) P
Tax depreciation in excess of book depreciation (100)
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86. The Current Tax Provision Example
Green, Inc. computed its pretax book income to be $1,000. Green identified the following four book/tax differences that it will report on Schedule M-1 when it files Form 1120 later in the year.
Tax-exempt interest income (book, not tax) P
Accrued warranty (book, not tax) (200) T
Nondeductible fine (book, not tax) (150) P
Tax depreciation in excess of book depreciation (100)T
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87. The Current Tax Provision
Compute taxable income
Book income $1,000
Tax-exempt interest income (50)
Accrued warranty
Nondeductible fine
Tax depreciation in excess of book
depreciation (100)
Taxable income $1,200
Compute the current tax provision (assume tax R = 35%)
$1,200 × 35% = $420
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88. Calculate Current and Deferred Income Tax Expense or Benefit Component
4) Determine the Ending Balances in the Balance Sheet Deferred Tax Asset and Liability Accounts
The deferred income tax expense or benefit portion of a company’s income tax provision reflects the change in a company’s deferred tax liabilities or assets that relate to continuing operations
The deferred tax accounts provide investors and other interested parties with a measure of a company’s expected future income tax related cash inflows (outflows) resulting from book-tax differences that are temporary in nature or from tax carryover
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89. Calculate Current and Deferred Income Tax Expense or Benefit Component
ASC 740 takes a “liability” or balance sheet approach for the computation of the deferred tax expense or benefit
The computations are based on the change in the cumulative differences between the financial accounting basis of an asset or liability and its corresponding tax basis from the beginning of the year to the end of the year
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90. Calculate Current and Deferred Income Tax Expense or Benefit Component
5) Determining Whether a Valuation Allowance is Needed
Evaluate the Need for a Valuation Allowance for Gross Deferred Tax Assets
A valuation allowance is required if it is more likely than not some or all of the deferred tax asset will not be realized in the future
ASC 740 identifies four sources of potential future taxable income, two of which are objective and other two are subjective
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91. Calculate Current and Deferred Income Tax Expense or Benefit Component
A. Objective sources
1) Future Reversals of Existing Taxable Temporary Differences
If the reversing taxable temporary differences provide sufficient future taxable income to absorb the reversing deductible temporary differences, the company does not record a valuation allowance against the deferred tax asset
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92. Calculate Current and Deferred Income Tax Expense or Benefit Component
2) Taxable Income in Prior Carryback Years
Company does not record a valuation allowance if the tax benefit from the realization of a deferred tax asset can be carried back to a prior year that has sufficient taxable income to absorb the realized tax benefit.
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93. Calculate Current and Deferred Income Tax Expense or Benefit Component
B. Subjective sources
1) Expected future taxable income exclusive of reversing temporary differences and carryforwards
A company might support its predictions of future taxable income with evidence of existing contracts or a sales backlog that will produce enough taxable income to realize the deferred tax asset when it reverses
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94. Calculate Current and Deferred Income Tax Expense or Benefit Component
2) Tax Planning Strategies
Includes sale and leaseback of operating assets
Changing inventory accounting methods
Refraining from making voluntary contributions to the company pension plan
Electing to capitalize certain expenditures rather than deduct them currently
Sale of noncore assets
Electing the alternative depreciation system
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95. Calculate Current and Deferred Income Tax Expense or Benefit Component
Negative Evidence That a Valuation Allowance Is Needed
ASC 740 requires that a company consider negative as well as positive evidence in determining whether it is more likely that a deferred tax asset will not be realized in the future.
Negative evidence includes
Cumulative (book) losses in recent years (usually 36 quarters)
A history of net operating (capital) losses and credits expiring unused
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96. Calculate Current and Deferred Income Tax Expense or Benefit Component
An expectation of losses in the near future
Unsettled circumstances that, if resolved unfavorably, will result in losses from continuing operations in future years
Calculate the Deferred Income Tax Expense or Benefit
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97. Calculate Current and Deferred Income Tax Expense or Benefit Component
6) Accounting for Uncertainty in Income Tax Positions
FAS 109 provided no specific guidance on how to deal with uncertain tax positions.
Companies generally applied the principles of FAS 5, Accounting for Contingencies, to uncertain tax positions.
The objective of FIN 48 (codified in ASC ) was to provide a uniform approach to recording and disclosing tax benefits resulting from tax positions that are considered to be uncertain.
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98. Calculate Current and Deferred Income Tax Expense or Benefit Component
ASC applies to all tax positions accounted for in accordance with ASC 740, including:
Previously filed positions
Expected filing positions
Decisions not to file tax returns in a particular jurisdiction
Decisions to exclude potentially taxable income
Choices made in classifying a transaction as tax-exempt or taxable
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99. Calculate Current and Deferred Income Tax Expense or Benefit Component
ASC applies a two step process in evaluating tax positions
1) Recognition process
Company first determines if it is more likely than not that its tax position on a particular account will be sustained on IRS examination based on its technical merits
Company then determines the amount it expects to be able to recognize
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100. Calculate Current and Deferred Income Tax Expense or Benefit Component
2) Measurement process
Requires the company to make a cumulative probability assessment of all likely outcomes of the audit and litigation process
A company recognizes the amount that has a greater than 50 percent probability of being sustained on examination and subsequent litigation
The amount not recognized is recorded as a liability on the balance sheet
Interest and Penalties – may be included in the provision or reported as a deduction in computing pretax income
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101. Calculate Current and Deferred Income Tax Expense or Benefit Component
Disclosures of Uncertain Tax Positions
Specific line items should disclose
Gross amounts of increases and decreases in liabilities related to uncertain tax positions as a result of tax positions taken during a prior period and current year
Amounts of decreases in liabilities related to uncertain tax positions relating to settlements with taxing authorities
Reductions in liabilities related to uncertain tax positions as a result of a lapse of the applicable statute of limitations
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102. Financial Statement Disclosure and Corporation's Effective Tax Rate
1) Balance Sheet Classification
ASC 740 requires companies (public and private) to disclose their deferred tax assets and liabilities on their balance sheets and classify them as either current or noncurrent (all are noncurrent beginning in 2016).
ASC 740 permits companies to net deferred tax assets and liabilities based on their classification and present the net amount on the balance sheet
ASC 740 does not permit netting of deferred tax assets and liabilities that are attributable to different tax jurisdictions
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103. Financial Statement Disclosure and Corporation's Effective Tax Rate
Atef Abuelaish

104. Financial Statement Disclosure and Corporation's Effective Tax Rate
2) Income Tax Footnote Disclosure
ASC 740 mandates that a company disclose
Components of the net deferred tax assets and liabilities reported on its balance sheet
Total valuation allowance recognized for deferred tax assets
3) ASC 740 also requires publicly traded companies to disclose these components
Current tax expense or benefit
Deferred tax expense or benefit
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105. Financial Statement Disclosure and Corporation's Effective Tax Rate
Benefits of operating loss carryforwards
Adjustments of a deferred tax liability or asset for enacted changes in tax laws or rates
Adjustments to the beginning of-the-year balance of a valuation allowance because of a change in circumstances that causes a change in management’s judgment about the realizability of the recognized deferred tax assets
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106. Financial Statement Disclosure and Corporation's Effective Tax Rate
4) Computation and Reconciliation of the Income Tax Provision with a Company’s Hypothetical Tax Provision
ASC 740 requires a company to reconcile its
Reported income tax provision attributable to continuing operations with
Amount of income tax expense that would result from applying its U.S. statutory tax rate to its pretax net income or loss from continuing operations
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107. Financial Statement Disclosure and Corporation's Effective Tax Rate
5) Importance of a Company’s Effective Tax Rate
The tax rate that backs out one-time and nonrecurring (discrete) events is referred to as the company’s structural tax rate
The structural effective tax rate often is viewed as more representative of the company’s effective tax rate from its normal (recurring) operations
The cash tax rate is used by analysts to compute a company’s tax status excluding deferred taxes
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108. Happiness is having all homework up to date
Homework assignment
Using Connect – 6 Questions for 60 Points for Chapter 17.
Tax Return; Course Project: Corporation Tax Return Problem # 2 “Blue Catering Service Inc.'s (BCS) 2016 Form 1120” on Pages C-16 till C-18.
Complete the “Connect Orientation” at Connect web site for 5 points, before 03/26/2017.
Prepare chapter 18 “Corporate Taxation: Non-Liquidating Distributions.”
Happiness is having all homework up to date
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109. Thank you and See You Next Week at the Same Time, Take Care
Atef Abuelaish