![]() After the “amount owed to the government” (current tax payable) is calculated we must then determine whether any other income taxes have to be recognized for financial reporting purposes. +/- Temporary differences (these are differences between amounts reported for tax purposes and those reported for book purposes) +/- Permanent differences (these are items recognized for book purpose, but never for tax purposes…or vice versa) Pretax financial income (this is what shows up in the company’s financial statements) Generally speaking, the equation to calculate current income tax expense or benefit is as follows: Remember, taxable income is different from financial income…it’s what the company actually owes the government(s). This is the amount of income taxes payable or receivable for the current year as determined by applying the provisions of tax law to taxable income or loss for the year. ![]() Let’s take a look at each of these components: We all know the general formula for the income tax provision: current tax expense or benefit + deferred tax expense or benefit = total income tax expense or benefit as reported in the financial statements. Under this method, which focuses on the balance sheet, the amount of deferred income tax expense is determined by changes to deferred tax assets and liabilities. The amount of income tax expense recognized for a period is the amount of income taxes currently payable or refundable, plus or minus the change in aggregate deferred tax assets and liabilities. The asset and liability method places emphasis on the valuation of current and deferred tax assets and liabilities. GAAP, specifically ASC Topic 740, Income Taxes, requires income taxes to be accounted for by the asset/liability method. ![]() If you’re one of those people who thinks they could use a refresher on ASC Topic 740 but haven’t made it out to see one of our live sessions yet, you’re in luck! Our three-part series on accounting for income taxes was just released on The Revolution, our new online learning platform! So, join me, and let’s take a quick tour of accounting for income taxes, starting with a general overview. But as one of those people who used to avoid it, I’m here to tell you: it’s the complexities that make it so interesting…in fact, it is now one of my favorite topics to teach in the classroom! There are an awful lot of accountants and auditors in this world who spend a majority of their time avoiding the subject of income taxes! Why? It’s complicated. Although my parents may always think every CPA prepares tax returns, we know the truth.
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