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Aspects of Income Tax Reporting in Financial Accounting
The foregoing discussion of income tax reporting has emphasized the issue of accelerated depreciation. This focus is appropriate because the predominant portion of temporary differences between the book and the tax bases of U.S. firms’corporate assets is due to differences in tax and book depreciation.
Tax and book income measurements differ, however, for many other reasons. For example, revenue and expense measurements in areas such as leasing, warranties, debt refinancing, exchanges of assets, and various other areas are treated differently for tax and book purposes. In some cases, the differences result in postponements of taxable income (as with accelerated depreciation). In other cases, however, the different treatments result in earlier recognition of taxable income. As a result, some firms may report deferred tax assets, rather than deferred tax liabilities. Figure 8.4 shows the reasons why the tax and book bases of various assets and liabilities differ for a major U.S. firm. Although further discussion of these other types of temporary differences is too specialized for this text, the basic framework that was used in calculating tax differences due to differences in depreciation methods applies in many other areas.
Figure 8.4 - Composition of Deferred Tax Assets and Liabilities
In addition to timing differences that give rise to deferred tax assets and liabilities, there are various other reasons why the percentage relation between a firm’s reported pre-tax income and its income tax expense may differ from the federal statutory corporate tax rate, which is currently 35 percent. For this reason, firms are required to disclose the causes of any significant differences between the statutory and the effective tax rate in the footnotes to the financial statements. The effective tax rate is the reported income tax expense as a percentage of reported income before tax. Figure 8.5 provides an example of such a disclosure. Note that for a given firm, effective tax rates can be either above or below the federal statutory rate. Some differences between these rates may be relatively stable over time (such as state and local taxes), and other causes may vary in their effects over time (such as settlements and adjustments of prior years’ taxes).
Figure 8.5 - Reconcilation of Statutory and Effective Tax Rates
More on Financial Accounting and Income Taxes
- Financial Reporting for Income Taxes
- Book and Tax Differences
- Aspects of Income Tax Reporting
- Deferred Taxes and the Liability Concept
Noncurrent Liabilities Topics
Bonds Payable (Long-Term Bonds Payable)
- Bonds Payable (Long-Term Bonds Payable)
- Issuance of Bonds at Par
- Sale or Issuance of Bonds at a Discount
- Sale or Issuance of Bonds at a Premium
- Early Retirement of Bonds
- Aspects of Borrowing Agreements
Financial Reporting for Income Taxes
