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Common Permanent Book-Tax Differences (chapter 9

)
Description

Explanation

Interest Income from Municipal Bonds

Income included in book income,
excluded from taxable income

Favorable

Death benefit from Life Insurance on Key
Employees

Income included in book income,
Excluded from taxable income

Favorable

Interest expense on loans to acquire
investments generating tax-exempt
income

Deductible for books,
but expenses incurred to generate tax-exempt income are not
deductible for tax

Unfavorable

Life insurance premiums for which
corporation is beneficiary

Deductible for books, but expenses incurred to generate taxexempt income (life insurance death benefit) are not deductible for
tax

Unfavorable

Meals and Entertainments expenses

Fully deductible for books, but only 50% deductible for tax

Unfavorable

Fines and Penalties and Political
Contributions

Deductible for books, but not for Tax

Unfavorable

Domestic Production Activities Deduction
(DPAD)

Deduction for businesses involved in manufacturing activities in the
U.S. equal to the lesser of 9% of the company’s qualified production
activities income (QPAI) or taxable income computed without DPAD
(i.e., the DPAD cannot create a NOL)

Difference

Favorable

but capitalized to inventory for tax purposes. Also. Difference reverses when inventory is sold.Common Temporary Book-Tax Differences Description Explanation Depreciation Expense (chapter 10) Difference between accelerated depreciation expense for tax purposes and straight-line depreciation expense for book purposes. Gain or loss on disposition of depreciable assets (chapter 11) Difference between gain or loss for tax and book purposes when corporation sells or disposes of depreciable property. is different for tax and book purposes. Unfavorable Warranty expense and other estimated expenses (chapter 9) Estimated expenses deducted for book purposes. accrued compensation to shareholders owning more than 50% of the corporation is not deductible until paid Unfavorable Organizational expenses and start-up costs (chapter 10) Immediately deducted for book purposes but capitalized and amortized for tax purposes (limited immediate expensing allowed for tax). Difference generally arises because depreciation expense and thus the adjusted basis of the asset. but actual expenses deducted for tax purposes Unfavorable Certain expenditures deducted for book purposes. Unfavorable UNICAP (§263A) (chapter 9) . but deductible when paid for tax purposes if accrued but not paid within 2. The difference is essentially the reversal of the booktax difference for the depreciation expense on the asset sold or disposed of. Initial Difference * Favorable Unfavorable Bad debt expense (chapter 9) Direct write-off method for tax purposes. allowance method for book purposes Unfavorable Unearned rent revenue (chapter 9) Taxable on receipt but recognized earned for book purposes Unfavorable Deferred compensation (chapter 9) Deductible when accrued for book purposes.5 months after year end.

the DPAD cannot create a NOL) Favorable Favorable Unfavorable Unfavorable Unfavorable Unfavorable Favorable .DESCRIPTION EXPLANATION DIFFERENCE Interest income from Municipal Bonds Death benefit from life insurance on Key Employees Interest expense on loans to acquire investments generating tax-exempt income Life insurance premiums for which corporation is beneficiary Meals and Entertainment expenses Fines and penalties and political contributions Domestic production activities deduction (DPAD) income included in book income excluded from taxable income income included in book income. excluded from taxable income deductible for books. but expenses incurred to generate tax-exempt income (life insurance death benefit) are not deductible for tax 50% deductible for tax deductible for books.e.. but expenses incurred to generate tax-expenpt income are not deductible for tax deductible for books.S. equal to the lesser of 9% of the company’s qualified production activities income (QPAI) or taxable income computed without the DPAD (i. but not for tax deduction for businesses involved in manufacturing activities in the U.

completely reverses when employees actually exercise the stock options . recover the cost of goodwill for book purposes only when and only to the extent goodwill is impaired Temporary Tax Amortization exceeds the book impairment expense – favorable / Permanent Book impairment expense exceeds the goodwill tax amortization – unfavorable / Temporary Corporate-Specific Deductions and Associated Book-Tax Differences Stock Options Exercise Price is usually the stock price on the day the options are issued to the employee Incentive Stock Options (ISO) less common.Chapter 16 – Corporate Operations ACCOUNTING PERIODS & METHODS Corporations Accrual overall method of accounting Avg recipts of $5million < 3yrs Cash Method not in existence for at least 3yrs – compute avg. earnings in income… – does not include dividend in income Temporary for difference between the pro rata share of income and the amount of the dividend. gross recpts to determine if allowed to use the Cash Method Goodwill acquired in an asset acquisition COMPUTING CORPORATE REGULAR TAXABLE INCOME Start with Book (financial reporting income) make adjustments for book-tax differences to reconcile to the tax numbers Book-Tax Differences Income and expense are accounted for differently for book and tax purposes Unfavorable book-tax difference any book-tax difference that requires an add back to book income to compute taxable income (it requires an adjustment that increases taxable income relative to book income) Favorable book-tax difference requires corporations to subtract the difference from book income in computing taxable income (because it decreases taxable income – and taxes payable-relative to book income) Permanent book-tax differences do not reverse over time Temporary book-tax differences that reverse over time such that over the long-term. own > 50% (beyond scope of text Tax – include in gross income Nonqualified Temporary unfavorable book-tax differences. for the value of options that vest during the year but are not exercised during that year. corporations recognize the same amount of income or deductions for the items Federal Income tax expense Book Tax – Dividends Tax – amortize purchased goodwill on a straight-line basis over 15 years. options that don’t qualify as ISOs deduct the difference between the fair market value of the stock and the exercise price of the option (bargain element) as compensation expense in the year which employees exercise the stock options income – deduct do not deduct Permanent There is no book-tax difference for incentive stock option granted before 2006 received Book – own <20% of stock include dividends in income NO book-tax difference They report favorable. more administrative qualification to qualify Never deduct any compensation expense associated with the options for tax purposes Nonqualified Stock Options (NQO) more common. recognized same or different as for tax purposes. Book – amt. Permanent – book-tax difference for the bargain element of nonqualified stock options granted before 2006 (when the options are exercised) own ≥ 20% but ≤50% – includes pro rata portion of distributing corp.