Accounting for TaxesIncome Tax

By Richard Handoko

Zane BaityCalistavania Hastapustaka

Bima SamuderaMuhammad Heickal

Accounting For Income Taxes

Accrual Basis VS Cash Basis

Pretax Financial Income Taxable Income

Income Tax Expense Income tax Payable

Amount reported as tax expense will often differ from the amount of

taxes payable to the taxing authority.

Example

Prambaru, Inc. reported revenues of Rp130m and expenses of Rp60m in each of its first three years of operations. For tax purposes, Prambaru reported the same expenses to the tax authority in each of the years. Prambaru reported taxable revenues of Rp100m in 2012, Rp150m in 2013, and Rp140m in 2014.

Calculation

Comparison

Temporary Differences vs Permanent Differences

Permanent Differences

Substantive differences It will appear every time

Example

Donation Benefit in Kind Cost to get and protect the income of Companies

Temporary Differences

Different time recognition No differences, but income recognition Or there are differences expense in a period of time

Example

Amortization / depreciation Inventory Valuation Differences in income statement because of the change of exchange

rates Differences income statement based on Stock

Deferred Tax Liabilities and Deferred Tax Assets

Temporary Differences

Future taxable amounts pay less now pay more in the future. This will result in: Deferred Tax Liability represents the increase in taxes payable in

future years as a result of taxable temporary differences existing at the end of the current year

Temporary differrences

Future deductible amounts pay more now, pay less later. This will result in: Deferred Tax Asset represents the increase in taxes refundable (or

saved) in future years as a result of deductible temporary differences existing at the end of the current year.

The differences happen due to accrual basis and cash basis

SC Corporation has one temporary difference at the end of 2007 that will reverse and cause taxable amounts of $55,000 in 2008, $60,000 in 2009, and $65,000 in 2010. South Carolina’s pretax financial income for 2007 is $300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2007.a) Compute taxable income and income taxes payable for 2007.b) Prepare the journal entry to record income tax expense, deferred income

taxes, and income taxes payable for 2007.

Deferred tax liability example

Current Yr.INCOME: 2007 2008 2009 2010Financial income 300,000 Temporary Diff . (180,000) 55,000 60,000 65,000 Taxable income 120,000 55,000 60,000 65,000 Tax rate 30% 30% 30% 30%Income tax 36,000 16,500 18,000 19,500

b. Income tax expense 90,000 Income tax payable 36,000 Deferred tax liability 54,000

Deferred Tax Assets example

AnuGerah Corporation has one temporary difference at the end of 2007 that will reverse and cause deductible amounts of $50,000 in 2008, $65,000 in 2009, and $40,000 in 2010. Columbia’s pretax financial income for 2007 is $200,000 and the tax rate is 34% for all years. There are no deferred taxes at the beginning of 2007. Columbia expects to be profitable in the future. a) Compute taxable income and income taxes payable for 2007.b) Prepare the journal entry to record income tax expense, deferred income

taxes, and income taxes payable for 2007.

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Taxable income (IRS) 55,000 50,000 65,000 40,000 Tax rate 34% 34% 34% 34%

Income tax 18,700 17,000 22,100 13,600

b. Income tax expense 18,700 Deferred tax asset 52,700

Income tax payable 71,400

Anugerah Corporation

a.

a.

TransactionWhen recordedin books

When recordedon tax return

Deferredtax effect

Rev or Gain Earlier Later Liability

Rev or Gain Later Earlier Asset

Exp or Loss Earlier Later Asset

Exp or Loss Later Earlier Liability

Summary of Temporary Differences

Carryback

An accounting technique with which a company retroactively applies net operating losses to a preceding year's income in order to reduce tax liabilities present in that previous year.

Carryback is not allowed in Indonesia

Carryforward

An accounting technique that applies the current year's net operating losses to future years' profits in order to reduce tax liability.

Carryforward is regulated by UU No.36 Tahun 2008

Carryforward

Aritcle 6 (2): Apabila penghasilan bruto setelah pengurangan sebagaimana dimaksud pada

ayat (1) didapat kerugian, kerugian tersebut dikompensasikan dengan penghasilan mulai tahun pajak berikutnya berturut-turut sampai dengan 5 (lima) tahun.

If the gross income after deducted with what has been regulated in section 1 resulting in a loss, then the loss can be compensated with earnings from the next year up to the next 5 (five) years.

Article 31A point c: kompensasi kerugian yang lebih lama, tetapi tidak lebih dari 10 (sepuluh)

tahun. Longer loss compensation, but no more than 10 (ten) years.

Carry forward Example

In 2013 PT XYZ has a net loss of Rp 50,000,000 and in 2014 the net income is Rp 100,000,000. What is the tax that should be paid in 2013 and 2014 by PT. XYZ

Carry forward Example

Tax payable in 2013 is Rp 0 Tax payable in 2014

(Rp 100,000,000 – Rp 50,000,000) x 25% = Rp 12,500,000

Applying tax rates

Basic rule: Apply the yearly tax rate to calculate deferred tax effects

If future tax rates change: use the enacted tax rate to apply in the future year.

If the new rates are not enacted yet into law for future years, the current rate should be used.

Revision of Future Tax Rates

When a change in tax rate is enacted, its effect should be recorded immediately

The effect is reported as an adjustment to tax expense in the period of change

Example

On December 10, 2012, corporate tax rate is changed from 40% to 30%. The new rate will enacted in January 1, 2014. the deferred tax account at the beginning of 2012 is as follows:

o Excess tax depreciation: Rp 3.000.000.000o Deferred tax liability : Rp 1.200.000.000 (at beginning 2012)o Related taxable amounts are expected to occur equally over 2013, 2014, and

2015

Provide the journal entry to reflect the change!

2013 2014 2015 TotalFuture taxable amounts

1.000.000.000

1.000.000.000

1.000.000.000

3.000.000.000

Tax rate 40% 30% 30%Deferred

tax liability

400.000.000 300.000.000 300.000.000 1.000.000.000

• 1.200.000.000 – 1.000.000.000 = 200.000.000

• Entry: Deferred Tax Liability 200.000.000

Income Tax Expense 200.000.000

Discussions

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