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De La Salle Lipa

Intermediate Accounting 3

Income and Expense Items affecting Deferred Taxes

Permanent Difference Temporary Difference

Non-Taxable Non-Deductible Future Taxable Future Deductible

Dividend income Fines, Penalties and Receivables Depreciation


received from domestic Surcharges *Rent Receivable (depreciation
corporations (Dividend -Tax penalty payments calculation differences)
income from foreign (example: penalties on
corporation is subject to underpaid taxes)
the regular corporate -Fines paid by the
tax) company as a result of
violation of law

Life Insurance 50% of business meals Deferred tax liability Estimates (estimated
Proceeds (if the and entertainment for - In depreciation product warranty cost
company is the tax purposes. expense when incurred or paid)
beneficiary) 100% of business - Tax - Warranty
meals and depreciation in expense
entertainment can be excess of book (Under financial
recorded in the books if depreciation reporting, it is
incurred in the normal (for example - recognized as
course of business. Accelerated an expense
Depreciation is when the
used for product is sold
taxation while while for
Straight-line taxation
method is used purposes it is
in financial deductible only
reporting) when actually
- on installment paid.)
sale
- Accounting
income is
higher than
taxable income

Interest income Fees and Licenses Differences in methods Allowance for bad debts
- on tax-exempt - Legal and used. For book
securities like professional purposes: equity
government fees which method of accounting
bonds, were not for investments when
municipal directly incurred equity income exceeds
bonds, treasury for trade/capital dividends declared
bills, tax- purposes. while for tax purposes:
exempt money income is recognized
market funds, when cash dividends is
health savings received
account
- bank deposits Recognition of equity-
method income for
example in the financial
statement there's a
debit in investment and
credit revenue but for
tax purposes
investment will be
debited and dividend
revenue will be credited
which will be converted
into cash in the future.

Gains already Interest expense Profits on installment A probable and


subjected to final payments sale recognition measurable litigation
withholding tax(capital -for instance, interest differences. (for book loss when actually
gains and taxes on underpayments for purposes: recognize at incurred or paid
withheld on bank noncorporate taxpayers the date of sale; for tax
deposits) -those related to non- purposes: recognize
income producing when collected)
assets

Gain from sale of Charitable contributions Interest and property Losses and tax credits
bonds, debentures, or in excess of tax taxes during that can be carried
other certificate of limitation construction (for book forward
indebtedness with a -corporate income tax purposes: taxes are
maturity of more than 5 payer - 5% of income capitalized; for taxation
years purposes: taxes during
construction is
deducted from taxable
income when paid)

Sickness and injury Expenses paid out in Completion method for Impairment loss
payment from an cash when they are long-term contracts in recognized in
employer-paid plan required to be paid progress accounting purposes
through banking (For book purposes: but ignored for tax
personnel Percentage-of- purposes until the asset
completion method; for is sold
income tax purposes:
completed-contract
method)

The remaining amount Goodwill Interest revenue, Accrued liabilities (such


of debt or loan that is received in arrears, as contingent liabilities)
cancelled or forgiven included in the
accounting profit on a
time apportionment
basis but taxable on a
cash basis

Proceeds from property Bribes, kickbacks, and Development costs Difference in


insurance contracts other illegal payments (capitalized and depreciation method
(which are not amortised to income used (for example,
exceeding the tax statement) Accelerated
basis, depreciated cost) Depreciation used in
financial reporting while
straight-line method is
used for taxation)

Special dividend Expenses for which no Prepayments Provisions for employee


received deduction: proper invoices or (capitalized and benefits such as long-
● For the supporting documents amortized as expense service leave
dividend are under Financial
received reporting but deducted
deduction, if the in full upon payment
company has under taxation)
less than 20
percent
ownership in
the other
business, the
company
deducts 70
percent. For
example, if the
dividend is
$100, the
company
reports only
$30 as taxable
income.
● For 20 to 80
percent
ownership, the
business
deducts 80
percent of the
dividend.
● For more than
80 percent
ownership, the
company
doesn’t report
any of the
dividend as
taxable income.

Gain on foreign Exploratory Cost - The The cost of a business Nonqualified deferred
exchange on a capital money you spend to combination that is compensation for key
transaction research business accounted for as an employees
opportunities you might acquisition is allocated
go into isn’t deductible. to the identifiable
Once you actually start assets and liabilities
a business, expenses acquired at fair value.
treated as start-up
costs can be deducted
in the first year within
certain limits.

Capital gains on Expenses related to Installment Sales Start-up costs and


disposal of equity stake tax-exempt income - Payment inventory cost due to
in other companies received by the capitalization of certain
(exempt in Singapore) company on business expenditures
installment
basis. They
record it as
revenue as a
whole.

Cash rebates on items Lobbying and other Accrued income Warranty costs,
you purchase from a political expenses - Income which compensation expense
retailer, manufacturer or has been for stock option plans
dealer. earned but not and loss on inventories
yet received in a later year
- Example is recognition differences.
Rent Income (for book purposes:
Receivable estimated in the current
year. For tax purposes:
deducted when paid)

Disability benefits from Impairment loss on An asset revalued Gains on sale and
a public welfare fund non-trade debts upwards and no leasebacks ( for
equivalent adjustment financial reporting: over
is made for tax the life of the lease
purposes. contract; for taxation: it
is taxed at the date of
sale)

Income exempt under Premium on life Unrealized holding


treaty insurance on losses
employees where the
entity is the
irrevocable
beneficiary

Child support payments Net operating loss Advances received


- regular financial carrybacks from customer
support used *Rent received in
for the needs of advance, Unearned
a child Service Revenue,
generally paid Unearned Subscriptions
by a non-
custodial parent
to the parent
who has
custody (or by
both parents if
someone else
has custody of
the child)

Money that is Depreciation Expense Bad debt expense


reimbursed for recognized under
qualifying adoptions - taxpayer decides the allowance method.
(Adoption Tax Credit) useful life, but change
in useful life must be
secured by the BIR
approval
- Depreciation of
appraised value in the
Philippines is not
allowed as deduction
from income tax
- Other special tax
privileges: (1) used in
mining but only allowed
10 or 5 years of
depreciation years (2)
constructed by an
educational education

- of certain types
of motor
vehicles like
yachts,
helicopters and
land vehicles
exceeding the
threshold ( only
one vehicle for
an official or
employee with
cost not
exceeding
P2,400,000)
are not allowed
to be deducted

An asset revalued
downward (Net
Realizable value of an
item of inventory, or the
recoverable amount of
an item of property,
plant and equipment
less than the previous
carrying amount)

Development Costs

Research costs

Amortization

Depletion

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