CH18 Income Taxes
Differences between Accounting and Taxable Income
The major reasons for differences:
•
Temporary differences/timing differences
o Revenues or gains are taxable before/after being recognized in accounting income
o Expenses or losses are deductible for tax purposes before/after they are recognized
in accounting income
o Differences will reverse over time
For Revenues:
Taxable  Recognize when cash is received
(Gain on disposal/ Holding gain/ Accrued liability not included until realized)
Accounting  Recorded when earned
For Expenses:
Not Deductible for tax purposes until paid
•
Permanent differences
o Items included in accounting income that are never included in taxable income
and vice versa

Non-tax-deductible expenses: fines and penalties, gym club fees,
expenses related to earning non-taxable revenue

Non-taxable revenue: dividends from taxable Canadian corporation,
proceeds on life insurance policies carried by the company on
employees/officers
o Affect only one period—there are no deferred or future tax consequences
Income Tax Loss Carryover Benefits
•
Tax laws permit taxpayers to use a tax loss of one year to offset taxable income of
other years
o Loss carryback: carry a tax loss back against taxable income of the
immediately preceding 3 years

Get a refund of income tax paid in the past years

Loss is usually first applied against the earliest available income

Immediate cash flow for tax refund
o Loss carryforward: carry losses forward to the 20 years immediately following
the loss

Reduce future taxable income if the company earns profits again

Useful if there’s no past income to carry the loss back against

If full amount of loss cannot be absorbed by carrybacks, then it can be
carried forward

Helps reduce future tax bills
•
If a loss is carried back, it is usually applied against the earliest available income
•
Decision on how to use a tax loss depends on what management sees as the greatest
tax advantage