Income Taxes (Deferred Tax Accounting)

Formula

Total tax expense = current (taxable income × rate) + deferred (change in deferred tax liability (DTL) − change in deferred tax asset (DTA)).

Permanent differences (no deferred tax)

Municipal interest · life insurance premiums/proceeds (company beneficiary) · fines · political contributions · 50% of meals · dividends received deduction.

Temporary differences

• DTL (tax later): accelerated tax depreciation, installment sales, prepaid expenses.
• DTA (deduct later): warranty and bad debt accruals, unearned revenue, net operating loss carryforwards.

Rules

• Use the enacted future rate; a rate change hits continuing operations in the enactment period.
• Valuation allowance if realization is not more likely than not.
• All deferred taxes are noncurrent; net by jurisdiction.
• Net operating losses (post-2020): carry forward indefinitely, 80% limit, no carryback.

Uncertain tax positions

1. Recognize if more likely than not to be sustained.
2. Measure the largest amount > 50% likely on settlement.

Check

Total expense = (pretax income ± permanent differences) × rate.

Exam traps

• Use the rate enacted for the year the difference reverses — ignore proposed rates until they are enacted.
• Undistributed earnings of an equity-method investee generally create a temporary difference, even though dividends received are partly deductible.
• The effect of a rate change on existing deferred taxes goes to continuing operations in the enactment period — even if the original item was recorded in other comprehensive income.