Presenting a live 110-minute teleconference with interactive Q&A ASC 740 Income Tax Accounting Challenges in 2013 Tackling Valuations of Deferred Tax Assets, Tax Expense and UTP Reporting, and Other Issues TUESDAY, MAY 28, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Douglas Sayuk, Partner, Clifton Douglas , San Jose, Calif. Cindy Frank, Senior Director, Tax Process Efficiency and Technology, BDO USA , Phoenix Jeffrey Zawada, Director, FreedMaxick CPAs , Buffalo, N.Y . For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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ASC 740 Income Tax Accounting Challenges in 2013 Seminar May 28, 2013 Cindy Frank, BDO USA Douglas Sayuk, Clifton Douglas cfrank@bdo.com douglas@cliftondouglas.com Jeffrey Zawada, FreedMaxick CPAs jeff.zawada@freedmaxick.com
Today’s Program Overview Of ASC 740 And Related Guidance Slide 8 – Slide 26 [Cindy Frank] Specific Income Tax Accounting Issues, Best Slide 27 – Slide 96 Practices [Douglas Sayuk, Cindy Frank and Jeffrey Zawada]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Cindy Frank, BDO USA OVERVIEW OF ASC 740 AND RELATED GUIDANCE
FAS 109/ASC 740 Objectives Recognize: 1. The amount of taxes payable or refundable for the current year 2. Deferred tax liabilities and assets for the future tax consequences 9
Basic Principles • A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. • A deferred tax liability or asset is recognized for estimated future taxes created by temporary differences. • The measurement of current and deferred taxes is based on the provisions of the enacted tax law. • Measurement of deferred tax assets is reduced if they will not be recognized. • These principles apply to domestic federal income taxes, and foreign and state and local taxes that are based on income. 10
Components Of Income Tax Expense Current income tax expense (benefit) +/- Deferred income tax expense (benefit) = Total income tax expense (benefit) 11
Current Income Tax Expense Item Amount Pre-tax book income $1,000,000 Permanent differences 100,000 Financial taxable income $1,100,000 Temporary differences 200,000 Taxable income per return $1,300,000 Tax rate 40% Tax liability (current portion of tax expense) $520,000 This example replicates a typical tax return expense calculation and represents only the current portion of income tax expense. Without FAS 109/ASC 740 principles, our tax expense would be $520,000. 12
Deferred Tax Expense • SFAS 109 requires the balance sheet approach to compute deferred taxes. To compute the deferred expense, you must compare the • beginning balance of temporary differences to their ending balance. • Temporary difference treatment in FAS 109/ASC 740 smoothens out the rate; there is no impact on book tax expense. 13
Components Of Total Expense Permanent differences: Arise from income that is permanently non-taxable and • expense items are permanently non-deductible Affect either the financial statements or the tax • return, but not both • Will always increase or decrease your effective tax rate • Will either cost tax dollars or save tax dollars 14
Current Income Tax Expense Item Amount Pre-tax book income $1,000,000 Permanent differences 100,000 Financial taxable income $1,100,000 Temporary differences 200,000 Taxable income per return $1,300,000 Tax rate 40% Tax liability (current portion of tax expense) $520,000 15
Permanent Differences Item Amount Pre-tax book income $1,000,000 Permanent differences • Meals and entertainment 50,000 • Fines and penalties 40,000 • Lobbying expenses 10,000 Total permanent differences $100,000 Financial taxable income $1,100,000 16
Permanent Differences (Cont.) Item Amount Permanent differences • Meals and entertainment 50,000 • Fines and penalties 40,000 • Lobbying expenses 10,000 Total permanent differences $100,000 Tax rate 40% Tax impact of permanent items $40,000 17
Permanent Differences (Cont.) Permanent differences will always affect your rate. Item Amount Pre-tax book income $1,000,000 Tax rate 40% Expected tax expense $400,000 Tax related to permanent items 40,000 Total expected tax expense $440,000 Effective tax rate = 440,000/1,000,000 = 44% (this is a short method of testing the rate) 18
Components Of Total Expense Temporary differences: Will generally have no impact on your effective tax rate • Are book/tax differences that will be deductible or • taxable in one or more future years Will either cost tax dollars or save tax dollars in the • current year, and will have the opposite effect in a future year 19
Current Income Tax Expense, Revisited Item Amount Pre-tax book income $1,000,000 Permanent differences 100,000 Financial taxable income $1,100,000 Temporary differences 200,000 Taxable income per return $1,300,000 Tax rate 40% Tax liability (current portion of tax expense) $520,000 20
Temporary Differences Year-End Current Year Year-End 12/31/2011 Activity 12/31/2012 Bad debt reserve $300,000 $250,000 $550,000 Accrued bonus 200,000 (50,000) 150,000 Total change in temp $500,000 $200,000 $700,000 differences Tax rate 40% 40% 40% Tax impact of $200,000 $80,000 $280,000 temporary differences 21
Temporary Differences (Cont.) Entry to record impact of temporary differences Debit Credit Deferred tax asset $80,000 Income tax expense $80,000 22
Remember Current Expense? Item Amount Pre-tax book income $1,000,000 Permanent differences 100,000 Financial taxable income $1,100,000 Temporary differences 200,000 Taxable income per return $1,300,000 Tax rate 40% Tax liability (current portion of tax expense) $520,000 23
Journal Entries Entries to record tax provision Debit Credit Deferred tax asset $80,000 Income tax expense $80,000 Income tax expense $520,000 Current tax payable $520,000 24
Income Tax Expense Income statement looks like: Item Amount Deferred tax benefit (reduces tax $(80,000) expense Current income tax expense 520,000 Total income tax expense $440,000 25
Remember This Shortcut Method? Item Amount Pre-tax book income $1,000,000 Tax rate 40% Expected tax expense $400,000 Tax related to permanent items 40,000 Total expected tax expense $440,000 Effective tax rate = 440,000/1,000,000 = 44% (this is a short method of testing the rate) 26
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