Chapter 14 Income Taxes amp; Financial Accounting.ppt

Chapter 14: Income Taxes Financial Accounting Income tax allocation MACR system SFAS no. 109 Investment tax credit Empirical research Income Tax Law of 1913 Established income as a basis for taxation Since income for tax purposes was defined differently than income for accounting purposes Resulted in many items being recognized in different time periods for tax and book purposes Efforts to synchronize tax and book accounting go back to the 1930s Income Tax Allocation Made necessary by the timing differences between when a revenue or expense item reaches the published financial statements as opposed to when it appears on the tax return tax expense is based on the published before-tax income figure Income Tax Allocation Comprehensive Allocation: as long as timing differences arise tax allocation must take place, despite the possibility of relevant circumstantial differences Permanent differences between published statements and tax returns are not subject to the allocation process Intrastatement ?or Intraperiod Tax Allocation items are shown net of the tax effect prior period adjustments extraordinary items changes in accounting principle operations of discontinued segments balance of the total tax expense figure then appears below net income before income taxes and extraordinary items Timing Differences Referred to as temporary differences Tax liability would be greater than tax expense where revenues are recognized for tax purposes earlier than for published re-porting purposes expenses are recognized more rapidly on the financial statements than on the tax return Tax expense is greater than tax liability when either revenues are recognized more slowly or expenses more rapidly for tax purposes than for book purposes Depreciation Using straight line for book and accelerated for tax purposes creates timing differences for a non-growth company a potentially permanent deferral for a growth-type company Federal government uses accelerated depreciation to stim