Accounting for Income Taxes Under ASC 740

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August 19, 2013

Review of the Basics and Recent Developments

A S C 7 4 0 – T H E B A S I C S


Establishes standards for financial reporting of income taxes.

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Miscellaneous 1099 Issues
Presented by Jennifer A. Driskill CPA, M.B.A.

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  • Current tax expense (benefit) on the income statement
  • Taxes payable / receivable on the balance sheet
  • Taxes deferred on the balance sheet

Applies to:

  • All income-based taxes:
    – Domestic federal income taxes
    – Foreign
    – State and local
  • Domestic and foreign operations consolidated, combined, or accounted for by the equity method
  • Foreign enterprises preparing financial statements in accordance with U.S. generally accepted accounting principles (US GAAP)
  • Identifies tax positions based on technical merit that were taken in past and are to be taken in current year
  • Identifies book to tax differences


Permanent Differences

  • Never expected to reverse in a future period
  • Book income / expense is not recognized for tax
  • Has no future tax consequences


  • Meals and entertainment
  • Penalties
  • Tax exempt income
  • Certain dividends / Dividends Received Deduction
  • Political contributions
  • Lobbying Expense
  • Auto-lease inclusion
  • Officer’s life insurance expense
  • Deferred charge basis differences


Temporary Differences
A difference between the timing of when an item of income or expense is recognized for financial statement purposes versus income tax purposes.

  • Certain items included in book income recognized at a different time then they are recognized for tax purposes.
  • Over time these items arise in one period and reverse in another period.
  • These items will eventually offset each other.

Common Temporary Differences

  • Bad debt reserve
  • Depreciation
  • Vacation accruals
  • Reserves for estimated expenses:
    – Warranty reserves
    – Reserve for inventory obsolescence
    – Contingent liability reserves
    – State and local tax reserves
  • Amortization
    – Tax Deductible Goodwill
    – Other intangibles

Accrued interest

  • Accrual to cash conversion


How do we identify book to tax differences?

  • Prior years’ tax returns
  • Audited Financial Statements
  • Tax workpapers
  • Current year trial balance compared to prior year
  • Understand balance sheet accounts - could they generate temporary differences?
  • Stock compensation plan review - impact
  • Discussions with client
  • Current year significant events
    – Transactions
    – Recapitalizations
    – Changes in ownership
    – Refinancings
  • Changes in Accounting Methods – current or prior year


What Are They?

  • Definition: The difference in book versus tax basis in an asset or liability that will reverse in time.
  • Consistency: Smooth the impact of tax expense and tax benefits over time so that financials / tax rates are consistent.

What is the Liability Method?

  • Tax effect of temporary differences in basis becomes either a deferred asset or a deferred liability.
  • Look at the balance sheet.

Deductible differences = deferred tax assets (DTAs)

  • Recognizes the deferred taxes related to taxable temporary differences
  • Less tax will be paid in the future
  • Creates a future tax benefit
    – Asset: Book basis < tax basis (Example: bad debt reserve)
    – Liability: Book basis > tax basis (Example: vacation accrual)

Examples of DTAs

Revenue items

  • Advance receipts for Goods or Services (revenue deferred for book but recognized currently for tax) Expense items
  • Bad Debt Reserve
  • Compensation accruals (vacations, bonus)
  • Contingency reserve accruals (legal, environmental

Examples of DTAs

Tax Attributes – i.e., Tax carryforward items

  • Foreign tax credits
  • Net operating losses
  • Research credits
  • AMT credit

(Caution: Consider whether need a valuation allowance)


Author: Katherine D. Morris, CPA, CohnReznick

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