Sid Glandon, DBA, CPA
Assistant Professor of Accounting
The University of Texas at El Paso

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Pretax financial income
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Determined in accordance with GAAP
Accrual accounting
Taxable income
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Determined in accordance with IRC
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Modified cash basis

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Income tax expense differs from income tax liability
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Temporary differences
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Tax vs. book depreciation
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Reverse over time
Permanent differences
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Municipal bond interest
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Does not reverse over time

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Represents the increase in taxes payable in future years as a result of temporary taxable differences existing at the end of the current year

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Represents the decrease in taxes payable in future years as a result of temporary taxable differences existing at the end of the current year

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Deferred Tax Assets
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Revenue and gains
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Recognized for income tax purposes
Deferred in financial statements
Expenses and losses
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Recognized in financial statements
Deferred for income tax purposes
Deferred Tax Liabilities
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Revenue and gains
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Recognized in financial statements
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Deferred for income tax purposes
Expenses and losses
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Recognized for income tax purposes
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Deferred in financial statements

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Items recognized for financial accounting purposes but not tax
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Interest income on tax exempt securities
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Fines and expenses resulting from violations of law
Items recognized for tax purposes but not financial accounting
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Dividends received deduction
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Percentage depletion on natural resources

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Schedule book to tax differences to derive taxable income
Calculate current income tax payable
Analyze temporary differences and schedule deferred tax assets and liabilities
Prepare t-account analysis
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Deferred tax assets
Deferred tax liabilities
Schedule Net deferred tax expense (benefit)
Schedule income tax expense
Prepare journal entry

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Based on all available evidence
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More likely than not that some portion or all of the deferred tax asset will not be realized
A valuation allowance is established to recognize the reduction in the carrying amount of the deferred tax asset account

Income tax expense
ACCOUNT DEBIT
Allowance Account
To reduce deferred tax asset to expected realizable value
XXX
CREDIT
XXX
The entry records a potential future tax benefit that is not expected to be realized in the future

Income Statement Presentation
Company
Income Statement
For the Period Ending December 31, XXXX
Revenues
Expenses
Income before income taxes
Income tax expense
Current
Deferred
Net income
$XXX,XXX
XXX,XXX
XXX,XXX
$ XX,XXX
X,XXX XXX,XXX
$XXX,XXX

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Apply the enacted tax rate for the year in question
Use the average of the enacted tax rate
Revision of future tax rates
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The effect is reported as an adjustment to income tax expense in the period of change
State and foreign income taxes

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Tax terminology
Tax deductions exceed taxable income
NOL for each year is computed
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Carry back 2 years (election-carry back option)
Carry forward 20 years (carry forward only)

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Financial accounting terminology
NOL can be derived from net loss
Any tax refunds are reported in the year of the original net operating loss

Year 2002
Gross income
Business deductions
Net loss
IRS Form
1120
$200,000
Financial
Statements
$200,000
(300,000) (300,000)
(100,000) ($100,000)
Dividend received deduction
NOL (tax loss)
(70,000)
($170,000)
Transaction
2002 NOL carryback
Taxable income, 2000
Revised taxable income, 2000
NOL carryforward to 2001
Tax refund
NOL
($170,000)
Taxable
Income Income Tax
40,000
$40,000
($40,000)
$0
$12,000
$0
(130,000)
$12,000

2000
1st year
2001
2nd year
TAX REFUNDS
2002
NOL
Carryback
Carryback
Carryforward
Carryforward
Carryforward
Carryforward
RECORD
TAX YEARS
2003
1st year
2004
2nd year
2005
3rd year
TAX SHELTER
2022
20th year

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Deferred tax classification relates to underlying asset or liability
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Current
Noncurrent
Sum all current tax assets and liabilities
Sum all noncurrent tax assets and liabilities

Income Statement Presentation
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Current and deferred income tax expense is allocated to:
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Continuing operations
Discontinued operations
Extraordinary items
Prior period adjustments