Income Tax Accounting (ASC 740)
Income Tax Provision
Current Tax Expense
Taxable income × tax rate
Based on tax return amounts
Total Current Tax Expense
Deferred Tax
Deferred Tax Asset (DTA)
Future deductible amounts
NOL/credit carryforwards
Valuation allowance if needed
Net DTA
Deferred Tax Liability (DTL)
Future taxable amounts
Accelerated depreciation
Total DTL
Net Deferred Tax Expense (DTL − DTA)
Income Tax Provision (Current ± Deferred)
Uncertain Tax Position (ASC 740-10)
Is it more likely than not (>50%) that the tax position will be sustained on technical merits?
YesDoes the largest amount with >50% cumulative likelihood equal the full tax position?
YesRecognize the full tax benefit — no unrecognized tax benefit liability needed
NoRecognize only the measured amount; record the difference as an unrecognized tax benefit liability
NoNo tax benefit recognized — record full unrecognized tax benefit as liability
Deferred Tax Asset/Liability
Temporary Difference × Enacted Tax Rate
Use rate expected to be in effect when difference reverses
Temporary vs. Permanent Differences
| Item | Type | Creates Deferred Tax? |
|---|
| Accelerated tax depreciation | Temporary | DTL |
| Warranty accrual (deductible when paid) | Temporary | DTA |
| Unearned revenue (taxable when received) | Temporary | DTA |
| Installment sale gain | Temporary | DTL |
| Municipal bond interest | Permanent | No |
| Fines and penalties | Permanent | No |
| Life insurance premiums on officers | Permanent | No |
| Meals expense (50% nondeductible) | Permanent | No |
DR DIGSDepreciation, Rent, Depletion, Interest (on bonds), Goodwill (amortization/impairment), Start-up costs
Common items that create deferred tax liabilities — book expense is less than tax deduction, so tax is deferred.
WUCCWarranties (accrued), Unearned revenue (taxed on receipt), Compensation (accrued), Credit losses (estimated)
Common items that create deferred tax assets — book expense now, tax deduction later, so future tax savings are recognized.