Download - C11 Chp 02 1B Reconcile Book Tax Income 2011
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Chapter 2B.
Corp. TaxationReconciliation of Book
and Taxable Income
Howard Godfrey, Ph.D., CPAProfessor of AccountingCopyright 2011
Edited December 28, 2010
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Reconcile taxand bookincome
[Page 25+]
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Corporation governed largely by
Section 162 when determiningdeductibility of payments toshareholders.
Shareholders governed largelyby Sections 162 and 212 whenmaking corporate relatedexpenditures, but are limited bySections 262 and 263(a)(1).
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162(a) In General. There shall beallowed as a deduction all the ordinaryand necessary expenses in carrying
on any trade or business, including-
(1) a reasonable allowance for salaries..
(2) traveling expenses
(3) rentals
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What is the presumption in theCode regarding the relationshipof corporate activities andSection 162(a)?
Does Section 212 apply tocorporations?
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Corporation's Taxable Income.Business Expenses. Deductions are
allowed for ordinary and necessarybusiness expenses.
No deduction is allowed for interest on
amounts borrowed to purchase tax-exempt securities, illegal bribes orkickbacks, fines or penalties imposed
by a government, or insurancepremiums incurred to insure the livesof officers and employees when thecorporation is the beneficiary.
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Return
Income per books-2011 $400,000 $400,000
Book Income includes:
Municipal bond Interest 8,000
Meals & entertain. Exp. 20,000Prem. - officers' life ins.
(corp. is beneficiary) 3,800
Capital losses 1,000Fines 200
What is taxable income?
Char. Corp.-organized 1-1-2011
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Return
Income per books-2011 $400,000 $400,000Book Income includes:
Municipal bond Interest 8,000 (8,000)
Meals & entertain. Exp. 20,000 10,000Prem. - officers' life ins.
(corp. is beneficiary) 3,800 3,800
Capital losses 1,000 1,000
Fines 200 200
What is taxable income? $407,000
Char. Corp.-organized 1-1-2011
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UNCC Corporation - 1 of 3
Compute Tax. Income Debit CreditsSales $700,000
Cost of sales $400,000
Mun. bond interest 2,000Compensation 100,000
Meals, entertain-Gros 20,000
Other Expense 140,000Subtotal 660,000 702,000
Net Income before tax
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UNCC Cor - 2 of 3 Debit CreditsSales $700,000
Cost of sales $400,000Mun. bond interest 2,000Com ensation 100,000Meals, entertain. (Gross) 20,000
Other Ex ense 140,000Subtotal 660,000 702,000Net Income before tax 42,000Add: one half of entertain.
Less: Mun. bond interestTaxable incomeIncome TaxCom ute E & P (Similar to Retained Earnin s)
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UNCC Corp - 3 of 3 Debit CreditsSales $700,000
Cost of sales $400,000Mun. bond interest 2,000Com ensation 100,000Meals, entertain. Gross 20,000
Other Ex ense 140,000Subtotal 660,000 702,000Net Income before tax 42,000Add: One half of entertain. 10,000
Less: Mun. bond interest (2,000)Taxable income 50,000Income Tax 7,500Com ute E & P Similar to Retained Earnin s
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Blue CorporationBlue Corp. reported GAAP netincome before income tax of$400,000 in its first year of
operation.Financial Statements include baddebts expense of $3,000.
Blue Corp. wrote-off bad debtstotaling $2,000 in first year.Taxable income for the year?____
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X Corp. taxable income in first year: $400,000.
Fin. Statements: bad debts exp. of $3,000.
X Corp. wrote-off bad debts totaling $2,000.
Taxable income will be $400,000 in future.
Fin. statements at end of first year include:a. Deferred tax asset of $340
b. Deferred tax asset of $660
c. Deferred tax liability of $340
d. Deferred tax liability of $660
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GAAP- 2011- Income Statement:
Sales (Gross) $200,000Cost of sales 100,000
Gross Profit 100,000
Expenses 60,000
Net income before taxes $40,000
For GAAP, company charges 4% of
gross sales to bad debts expense.
Allow. for bad debts, 12/31/2010 $5,000Allow. for bad debts, 12/31/2011 4,000
What is taxable income for 2011?
a. $ 40,000 b. $42,000 c. $39,000 d. $38,00
Big Corp. Bad Debts-Sec. 166
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Bad Debts. Direct write-off for Tax Purposes
Amounts in$Thousands GAAP Tax GAAP Tax
Sales $800 $800 $800 $800
Cost of Sales 500 500 500 500
Gross Margin 300 300 300 300
Bad Debts Expense 80 60 50 60
Total other expenses 100 100 120 120
Net Income Before Tax $120 $140 $130 $120
Assume income tax rate is 34%
Amount of the deferred tax asset at 12-31-2011?
Sales Co. (Co. started in 2010) [1]
2010 2011
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Book TaxableYear Income Income
2008 $120,000 $140,000
2009 130,000 120,000
Total 250,000 260,000
10,00034%
$3,400
Sales Co. [2]
DifferenceMarginal rate
Deferred Tax Asset
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Sales $100
Bad debts (provision) 5Other Ex enses 80Total Ex enses 85
Net Income before Taxes $15Beg. End.
Accounts Receivable $80 $85
Allow. for Bad Debts $7 $4
Amount of Acct. Rec. written off?
What is taxable income?
Bad Debts Problem ($000)
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Beg. Bal. XXX 80 71 Sales
2 Collection
3 Write-off
4 Other Exp.5 Provision
Balance
1 Sales
4 Other Exp.
5 Provision
Bad Debts Problem
Cash AllowanceAccts. Rec.Transaction
Revenue
Revenue and Expense ($000)
Bad Debts Exp.Other Exp.Transaction
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Book income before tax $400,000
Revenue included:Tax-exempt interest income 8,000
Expenses included:
Meal & Entertainment Exp. 22,000
Life insurance premium 3,300
Fines 200
Taxable income
Tax Rate
Income Tax Liability
Maxwell Corp. Book/Tax Differences
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Book income before tax $400,000
Tax-exempt interest income
Meal & Entertainment Exp.
(50% x $22,000)
Life insurance premium
Fines
Taxable incomeTax Rate 34%
Income Tax Liability
All adjustments - permanent differences.
Maxwell Corp. Book/Tax Differences
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Book income before tax $400,000
Tax-exempt interest income (8,000)
Meal & Entertainment Exp.
(50% x $22,000) 11,000
Life insurance premium 3,300
Fines 200
Taxable income $406,500Tax Rate 34%
Income Tax Liability $138,210
All adjustments - permanent differences?
axwell Corp. Book/Tax Difference
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Maxwell Corp. Book/Tax
Please prepare
schedule M-1.
Appendix pg. B-32of your textbook.
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Schedule M-1 Reconciliation of Income (Loss) per Books with Income per Return
1 Net income (loss) per books...... 7 Income recorded on books this year
2 Federal income tax.............................not included on this return (itemize):
3 Excess of capital losses over capi tal gains Tax-exempt interest.
4 Income subject to tax not recorded on
books this year (itemize): 8 Deductions on this return not charged
against book income this year (itemize):
5 Expenses recorded on books this yr, a. Depreciation
not deducted on this retum (itemize): b. Charitable Contributions
a Depreciation ..............
bContributions ....
c Travel and entertainment...
9 Add lines 7 and 8
6 Add lines 1 throuqh 5 10 Income (Line 28, pg 1) - ln 6 less ln 9
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Schedule M-1 Reconciliation of Income (Loss) per Books with Income per Return
1 Net income (loss) per books...... $400,000 7 Income recorded on books this year
2 Federal income tax.............................not included on this return (itemize):
3 Excess of capital losses over capi tal gains Tax-exempt interest. $8,000
4 Income subject to tax not recorded on $8,000
books this year (itemize): 8 Deductions on this return not charged
against book income this year (itemize):
5 Expenses recorded on books this yr, a. Depreciation
not deducted on this retum (itemize): b. Charitable Contributions
a Depreciation ..............
bContributions ....
c Travel and entertainment... $11,000
Life Ins. Prem. $3,300 Fines $200 $14,500 9 Add lines 7 and 8 $8,000
6 Add lines 1 throuqh 5 $414,500 10 Income (Line 28, pg 1) - ln 6 less ln 9 $406,500
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Sales $100
Bad debts ( rovision) 5Other Ex enses cash 80Total Ex enses 85Net Income before Taxes $15
Beg. End.Accounts Receivable $80 $85Allow. for Bad Debts $7 $4
Amount collected from customers?Amount of Net Cash Flow-before taxes?
What is Taxable Income?
Accrual to Cash. ($000)-Slide 1
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Beg. Bal. XXX 80 71 Sales
2 Collection
3 Write-off
4 Other Exp.
5 Provision
Balance
1 Sales
4 Other Exp.
5 Provision
Accrual to Cash Problem - Slide 2
Cash AllowanceAccts. Rec.Transaction
Revenue
Revenue and Expense ($000)
Bad Debts Exp.Other Exp.Transaction
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Client recorded 2011 transactions on cash basis
and prepares the tax return on the accrual basis.
Collections from customers in 2011 $300,000
Cash payments for expenses 200,000Other information
Beginning Accounts Receivable 100,000
Ending Accounts Receivable 90,000Write-off of uncollectible accounts 4,000
Depreciation Expense 50,000
Change in accounts payable 0
All sales are on creditDirect Charge-Off Method is used.
What is amount of sales (accrual)?
What is taxable income?
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Client - Slide 2 of 3Cash Ac-Rec. Other Rev. Exp.
Beg. Bal.
Sales
Collection
Write-off
Deprec.Other Exp.
Balance
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Client - Slide 3 of 3Cash Ac-Rec. Other Rev. Exp.
Beg. Bal. 100
Sales 294 294
Collection 300 (300)
Write-off (4) 4
Deprec. (50) 50Other Exp. (200) 200
Balance 90
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Office Rental Inc. Slide 1 of 6.Office Rental, Inc. collects rent in advance
from some tenants and bills others at theend of each month for that months rent. The
accrual basis income statement (GAAP) for
Year 2 shows revenue earned of $54,700.Rent Receivable was $3,100 at start of Year2 and $2,500 at the end of Year 2.
Unearned Revenue Account had a balanceof $2,600 at start of Year 2 & $1,300 at end ofYear 2. What is cash basis revenue for Year2 (collections from tenants)?
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Year 2 Year 1Balance Sheet
Rent receivable $2,500 $3,100
Unearned revenue $1,300 $2,600
GAAP Income Statement:
Rent Revenue $54,700 $49,800Cash Collections from
tenants for rent?
Office Rental Inc.-Slide 2 of 6
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Year 2 Year 2
Revenue Earned-Yr 2 $54,700 $54,700
Beg. Rent Receivable 3,100
End. Rent Receivable 2,500Beg. Unearned Revenue 2,600
End. Unearned Revenue 1,300
Collected from tenants
In Year 2, you collected receivables
of $3,100 for rent in Year 1, etc.
Office Rental Inc.-Slide 3 of 6
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Year 2 Year 2
Revenue Earned-Yr 2 $54,700 $54,700
Beg. Rent Receivable 3,100 3,100
End. Rent Receivable 2,500 (2,500)Beg. Unearned Revenu 2,600 (2,600)
End. Unearned Revenue 1,300 1,300
Collected from tenants $54,000
In Year 2, you collected receivables
of $3,100 for rent in Year 1, etc.
Office Rental Inc.-Slide 4 of 6
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Revenue-accrual basis-Year 2 tax return?
GAAP Revenue for Year 2 54,700Beg. Rent Receivable
End. Rent Receivable
Beg. Unearned Revenue
End. Unearned Revenue
Revenue on Tax ReturnTax law follows GAAP for accruing
receivables, but not for reporting
rent income received in advance.
Office Rental Inc.-Slide 5 of 6
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Revenue-accrual basis-Year 2 tax return?
GAAP Revenue - Year 2 54,700Beg. Rent ReceivableEnd. Rent Receivable
Beg. Unearned Revenue (2,600)End. Unearned Revenue 1,300Revenue on Tax Return $53,400
Tax law follows GAAP for accruingreceivables, but not for reportingrent income received in advance.
Office Rental Inc.-Slide 6 of 6
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Realty Corp. Rental IncomeRealty Co. was organized on Jan-1, year 1.
Realty bought a building on that date for$400,000, having an estimated 40-year lifewith no salvage. The S/L depreciationmethod is used for tax & GAAP.
Depreciation is $10,000 per year on the taxreturn and in the GAAP statements.
Realty rented the building to IBM for 2 years
at $20,000 per year. Rent of $40,000 wasreceived on Jan-1, year 1. Realtys incometax rate is 40%. Year 1 operations aredescribed on the next slide.
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GAAP Tax
Rent Revenue $20,000Cash Expenses (5,000)
Depreciation Exp. (10,000)
NIBT/Taxable Income 5,000Income Tax Rate 40%
Income Tax Expense
Income Tax Paid
Net Income
asset or liability at end of Yr 1?
Realty Corporation - Slide 2.
What is the amount of the deferred tax
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GAAP Tax
Rent Revenue $20,000 $40,000Cash Expenses (5,000) (5,000)
Depreciation Exp. (10,000) (10,000)
NIBT/Taxable Income 5,000 25,000Income Tax Rate 40% 40%
Income Tax Expense 2,000
Income Tax Paid 10,000
Net Income 3,000
asset or liability at end of Yr 1?
Realty Corporation - Slide 3.
What is the amount of the deferred tax
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GAAP Tax
Rent Revenue $20,000 $40,000Cash Expenses (5,000) (5,000)
Depreciation Exp. (10,000) (10,000)
NIBT/Taxable Income 5,000 25,000Income Tax Rate 40% 40%
Income Tax Expense 2,000
Income Tax Paid 10,000
Net Income 3,000
asset or liability at end of Yr 1? 8,000
Realty Corporation - Slide 4.
What is the amount of the deferred tax
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Gross sales in ear 1 $500,000
Cost of sales in ear 1 250,000Other Ex enses in ear 1 100,000Net Income Before Taxes- Yr $150,000Year 1 sales collected in:
Year 1 $300,000Year 2 $200,000
Income Tax Rate 40%Method used for GAAP: Accrual
Method used for Tax: Inst. SalesAmount of deferred tax asset
or liabilit at end of Year 1?
Is it a Def. Asset or Liability?
Income Tax Accounting
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Gross sales in ear 1 $500,000
Cost of sales in ear 1 250,000Other Ex enses in ear 1 100,000Net Income Before Taxes- Yr $150,000Year 1 sales collected in:
Year 1 $300,000Year 2 $200,000
Income Tax Rate 40%Method used for GAAP: Accrual
Method used for Tax: Inst. SalesAmount of deferred tax asset
or liabilit at end of Year 1? 80,000$
Is it a Def. Asset or Liability? Liability
Income Tax Accounting
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Note, the installment sales methodis generally prohibited for dealersin inventory. However it is allowedin limited circumstances.
The problem on the precedingslide is included to help illustratethe differences between accrual
accounting and other revenuerecognition methods and the
impact on deferred taxes.
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The
End