Chapter 14 Lecture.ppt

Chapter 14 Lecture Income Taxes, Unusual Income Items, and Investments in Stocks Corporate Income Taxes Corporations are legal entities that must pay federal income taxes depending on the state, they may also be required to pay state and local income taxes Most corporations are required to make quarterly installments based on estimated taxes Corporate Income Taxes Because income taxes often represent a significant amount, they are normally reported on the income statement as a special deduction earnings are reported before income taxes, income taxes are deducted, and earnings are restated after income taxes Corporate Income TaxesPayment of Income Taxes Corporate Income TaxesAllocation of Income Taxes Taxable income is determined according to the tax laws Taxable income is often different from “income before income taxes” as reported on the Income Statement There are several reasons for the differences, including using the straight-line method of depreciation for financial reporting purposes, and using MACRS (Modified Accelerated Cost Recovery System) for tax purposes Corporate Income TaxesAllocation of Income Taxes The difference between “income before income and taxes” as reported on the income statement (which is calculated based on GAAP) and taxable income (which is calculated according to tax laws), may need to be allocated between various financial statement periods. Corporate Income TaxesAllocation of Income Taxes The total amount of taxes paid does not not change. Only the timing of the payment of taxes is affected. This is because many managers use tax-planning strategies to delay (postpone, or defer) the payment of taxes to later years. Corporate Income TaxesAllocation of Income Taxes Illustrated To illustrate, assume that a corporation reports $300,000 income before income taxes on its income statement. If the income tax rate is 40%, the income tax as reported on the income statement is $120,000 ($300,000 x .4). Corporate Income TaxesAllocat