22-05-2014, 03:27 PM
Accounting for Income Taxes
Accounting for Income.ppt (Size: 214.5 KB / Downloads: 259)
Some general observations:
The Internal Revenue Code which governs the accounting for tax liability is not the same as GAAP which governs financial reporting.
As a result,
taxable income reported to the IRS (using cash basis accounting) may not be the same as pre-tax profit that is reported to shareholders (using accrual accounting).
The amount of tax liability due to the IRS may not be the same as income tax expense that is reported on the income statement.
As an example of the differences between book and tax income, consider a company that depreciates its assets using the straight-line method for financial reporting purposes and an accelerated method for tax purposes. This is typical for most companies.
Loss carrybacks and loss carryforwards:
When a company realizes a net loss for tax purposes, the IRS allows it to offset this loss against prior year’s taxable income and to receive a refund for taxes paid in the past. It can carry these losses back up to 3 years. If the company does not have sufficient taxable income in the preceding 3 years to absorb these losses, it can carry the remaining losses forward for 15 years and deduct them against taxable income to be realized in the future.