Income Taxes

Temporary Book/Tax Differences

• All temp differences caused by company using one method on books and another accounting
method on their tax return
• All temporary differences reverse themselves in future years
• “FTA” = Future taxable amount
• “FDA” = Future deductible amount
1. Type 1 – On I/S now, won’t be on tax return till later

a. Installment Sales (accrue revenue for books now, taxed later as installments
received)
b. LT contracts (%-completion on books, completed contract for tax)
c. Estimated expenses (warranty exp)
2. Type 2 – On tax return now, won’t be on I/S till later

a. Collections in Advance (prepaid rent taxed when collected, booked evenly)

b. Accelerated Depreciation (MACRS for tax, SL for I/S in this case)
Recording DTA/DTL
• Use enacted tax rates for future years only (do not estimate future tax rates)
• Use effective annual rate for whole tax year, not quarterly rates, statutory rates, or anticipated
rates

Balance Sheet Classification

• Current/noncurrent based on underlying asset or liability
• E.g. DTL from depreciation on fixed assets is considered noncurrent

Permanent Differences
• Arise if company has item on books that will never be on tax return (never reverses itself)
1. Key-Person Life insurance expense
a. Corp pays premiums on officer’s life insurance policy which it’s a beneficiary
b. Go to I/S as an expense, but IRS disallows this deduction!!!
2. Life Insurance Proceeds
a. Never taxed, but reported under ‘other income’ on I/S
3. Municipal Bonds interest income
a. I/S = yes, Tax return = not taxed
4. Dividend Received Deduction
a. $1000 goes to I/S, and tax return has only $200 of dividend income from 80% DRD
deduction