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CHAPTER # 16 REVIEW Atef Abuelaish

Chapter 16 Corporate Operations Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Taxable Income X Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Taxable Income X Tax Rates = Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Total Taxes – Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Total Taxes – Credits – Atef Abuelaish

Corporate Taxable Income Formula Gross Income – Deductions = Taxable Income X Tax Rates = Regular Income Tax Liabilities + Other Taxes = Total Taxes – Credits – Prepayments = Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish 16-15

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 Atef Abuelaish 16-16

Common Permanent Book-Tax Differences Interest income from municipal bonds Atef Abuelaish 16-17

Common Permanent Book-Tax Differences Interest income from municipal bonds (Fav) Death benefit from life insurance on key employees Atef Abuelaish 16-18

Common Permanent Book-Tax Differences Interest income from municipal bonds (Fav) Death benefit from life insurance on key employees (Fav) Life insurance premiums Atef Abuelaish 16-19

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 Atef Abuelaish 16-20

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 (UnFav) Fines and penalties and political contributions Atef Abuelaish 16-21

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 (UnFav) Excess compensation to executives Atef Abuelaish 16-22

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 (UnFav) Federal income taxes Atef Abuelaish 16-23

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 (UnFav) Dividends received deduction Atef Abuelaish 16-24

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 (Fav) Domestic manufacturing deduction Atef Abuelaish 16-25

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 (Fav) Atef Abuelaish 16-26

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 Atef Abuelaish 16-27

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? Atef Abuelaish 16-28

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). Atef Abuelaish 16-29

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? Atef Abuelaish 16-30

Stock Option Example 2 Solution Answer: $100,000 favorable, temporary book-tax difference in 2017. The favorable book-tax difference is a complete reversal of the unfavorable book-tax difference in 2016. 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). Atef Abuelaish 16-31

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? Atef Abuelaish 16-32

Stock Option Example 3 Solution Answer: $180,000 favorable book-tax difference in 2017. 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]. Atef Abuelaish 16-33

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 Atef Abuelaish 16-34

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? Atef Abuelaish 16-35

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? Atef Abuelaish 16-36

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 Atef Abuelaish 16-37

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 Atef Abuelaish 16-38

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 Atef Abuelaish 16-39

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 Atef Abuelaish 16-40

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 Atef Abuelaish 16-41

Form 1120 Schedule M-1 Atef Abuelaish 16-42

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 Atef Abuelaish 16-43

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 Atef Abuelaish 16-44

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Adjustments = Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = Atef Abuelaish

Alternative Minimum Tax Formula Taxable income (before NOL DED) + Preference Items +- Adjustments = Preadjustement AMT Income +- ACE Adjustment – NOL Deduction = AMTI - Exemption = AMT Base X Atef Abuelaish

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% = Atef Abuelaish

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 – Atef Abuelaish

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 = Atef Abuelaish

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 – Atef Abuelaish

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 = Atef Abuelaish

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 Atef Abuelaish

Accounting for Tax Income Chapter 17 Accounting for Tax Income Atef Abuelaish

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. Atef Abuelaish

Learning Objectives (cont.) Explain how a company accounts for its uncertain income tax positions under ASC 740-10 (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.” Atef Abuelaish

Break for 10 Minutes Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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. Atef Abuelaish

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. Atef Abuelaish

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) Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

Calculate Current and Deferred Income Tax Expense or Benefit Component Atef Abuelaish

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 Atef Abuelaish

Calculate Current and Deferred Income Tax Expense or Benefit Component Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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. Atef Abuelaish

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 Atef Abuelaish

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 P Accrued warranty (book, not tax) (200) Atef Abuelaish

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 P Accrued warranty (book, not tax) (200) T Nondeductible fine (book, not tax) (150) Atef Abuelaish

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 P Accrued warranty (book, not tax) (200) T Nondeductible fine (book, not tax) (150) P Tax depreciation in excess of book depreciation (100) Atef Abuelaish

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 P Accrued warranty (book, not tax) (200) T Nondeductible fine (book, not tax) (150) P Tax depreciation in excess of book depreciation (100)T Atef Abuelaish

The Current Tax Provision Compute taxable income Book income $1,000 Tax-exempt interest income (50) Accrued warranty 200 Nondeductible fine 150 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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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. Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 740-10) was to provide a uniform approach to recording and disclosing tax benefits resulting from tax positions that are considered to be uncertain. Atef Abuelaish

Calculate Current and Deferred Income Tax Expense or Benefit Component ASC 740-10 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 Atef Abuelaish

Calculate Current and Deferred Income Tax Expense or Benefit Component ASC 740-10 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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

Financial Statement Disclosure and Corporation's Effective Tax Rate Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

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 Atef Abuelaish

Thank you and See You Next Week at the Same Time, Take Care Atef Abuelaish