1. Deferred Taxes

2. Definitions Definitions Income taxes payable (current taxes payable) – amount due for taxes in the current year as a result of filing the current year’s tax return Income taxes payable (current taxes payable) – amount due for taxes in the current year as a result of filing the current year’s tax return Taxable income – amount computed as subject to tax on the entity’s tax filing Taxable income – amount computed as subject to tax on the entity’s tax filing Accounting income (pretax accounting income) – amount reported before tax expense in the company’s income statement Accounting income (pretax accounting income) – amount reported before tax expense in the company’s income statement

3. Deferred Taxes Definitions Definitions Permanent differences (nontemporary differences) – transactions or events that will never affect the computation of taxable income (accounting income) but do affect accounting income (taxable income) Permanent differences (nontemporary differences) – transactions or events that will never affect the computation of taxable income (accounting income) but do affect accounting income (taxable income) Temporary differences – transactions or events that are reported in taxable income in a different period than they are reported in accounting income Temporary differences – transactions or events that are reported in taxable income in a different period than they are reported in accounting income

4. Deferred Taxes Definitions Definitions Temporary difference originate in one period (originating differences) and reverse in a later period Temporary difference originate in one period (originating differences) and reverse in a later period Deferred tax assets – arise when the originating difference causes taxable income to exceed accounting income (future deductible amount) Deferred tax assets – arise when the originating difference causes taxable income to exceed accounting income (future deductible amount) Computed by multiplying the amount of the originating difference by the enacted rate for the period in which the difference will reverse Computed by multiplying the amount of the originating difference by the enacted rate for the period in which the difference will reverse

5. Deferred Taxes Definitions Definitions Deferred tax liabilities – arise when the originating difference causes accounting income to exceed taxable income (future taxable amount) Deferred tax liabilities – arise when the originating difference causes accounting income to exceed taxable income (future taxable amount) Computed by multiplying the amount of the originating difference by the enacted rate for the period in which the difference will reverse Computed by multiplying the amount of the originating difference by the enacted rate for the period in which the difference will reverse The effect of each temporary difference is computed and classified separately. The effect of each temporary difference is computed and classified separately.

6. Deferred Taxes Definitions Definitions Valuation Allowance – a contraaccount which reduces a deferred tax asset to its estimated net realizable value Valuation Allowance – a contraaccount which reduces a deferred tax asset to its estimated net realizable value

7. Deferred Taxes Definitions Definitions Income tax expense = income taxes payable Income tax expense = income taxes payable + increase in deferred tax liabilities + increase in deferred tax liabilities + decrease in deferred tax assets + decrease in deferred tax assets - decrease in deferred tax liabilities - decrease in deferred tax liabilities - increase in deferred tax assets - increase in deferred tax assets + increase in valuation allowance + increase in valuation allowance - decrease in valuation allowance - decrease in valuation allowance

8. Deferred Taxes Important items Important items You must be able to reconcile taxable income with accounting income (temporary differences in the period) You must be able to reconcile taxable income with accounting income (temporary differences in the period) You must recompute the balances in deferred tax assets (including valuation allowance) and deferred tax liabilities whenever a new tax rate or tax law is enacted. You must recompute the balances in deferred tax assets (including valuation allowance) and deferred tax liabilities whenever a new tax rate or tax law is enacted.

9. Tax Loss Carryback/Carryforward This is an IRS regulation and not a GAAP invention This is an IRS regulation and not a GAAP invention If a company reports a net operating loss (negative taxable income) on its tax return, it may: If a company reports a net operating loss (negative taxable income) on its tax return, it may:

10. Tax Loss Carryback/Carryforward 1. Apply the loss against taxes paid in the previous two years (it will get a refund of those taxes); 2. Apply the losses against future income for up to the next twenty years; or 3. A combination of 1 and 2

11. Tax Loss Carryback/Carryforward The amount of tax savings as a result of the carryback and/or carryforward is an income tax benefit and it reduces the reported loss on the company’s income statement. The amount of tax savings as a result of the carryback and/or carryforward is an income tax benefit and it reduces the reported loss on the company’s income statement. There is a requirement for a valuation allowance if the company will use a carryforward and the reported benefit must be adjusted. There is a requirement for a valuation allowance if the company will use a carryforward and the reported benefit must be adjusted.