Chapter
6
Taxable Income from
Business Operations
Interpreting the Tax Provision in Financial
Statements
Accrual accounting required for financial reporting
purposes
Publicly traded corporations also generally use accrual
accounting for tax reporting purposes
However, there remain significant differences in
methods of accounting for book and tax even though
both use accrual accounting:
Bad debts, warranty expense, etc.
Depreciation methods are generally accelerated for tax
e.g., “bonus” depreciation, Sec. 179 deduction, MACRS
Some expenses (fines, “excess” executive compensation, etc.) must
be accrued on financial statements, but aren’t deductible
Foreign income not subject to U.S. tax until “repatriated”
Accounting for Income Taxes (on Financial
Statements)
Financial statements must report the taxes that will
be payable, either currently or in a future year, as a
result of current year operations
Information must be reported allowing users to
interpret income tax expense reported on financial
statements:
Current tax expense—paid or payable in current year
Deferred tax expense—attributable to income earned in
current year, but payable in future year
Accounting for Income Taxes—Example
Depreciable equipment purchased for $40,000,000.
Depreciated using SL method for book over 8 years
50% Bonus depreciation + 5-yr MACRS for tax
Net income before taxes for book = $75,000,000, of which
$25,000,000 is attributable to its foreign subsidiary, taxed in
the foreign country at 20%
What is taxable income?
What is tax payable—foreign?
U.S.?
What is tax expense for financial reporting purposes?