Financial Accounting Theory and Analysis, 15th Edition

12Accounting for Income Taxes

Most accountants now agree that corporate income tax is an expense and treating income tax as an expense is required under current US GAAP. This treatment is consistent with the proprietary theory because the earnings that accrue to owners are reduced by corporate obligations to the government. Also, because income tax does not result from transactions with owners, expensing corporate income tax is consistent with the SFAC No. 8, Chapter 8, definition of comprehensive income. Thus, on the surface, accounting for income taxes would appear to be a nonissue.

Nevertheless, accounting for income taxes has long been a controversial topic due to various reporting and measurement issues. In this chapter, we trace the historical development of US GAAP for income taxes, addressing the accompanying theoretical issues. We explore the evolution of income tax reporting requirements in key pronouncements: APB Opinion No. 11, SFAS No. 96, and SFAS No. 109 (see FASB ASC 740). We'll also review updates introduced in FIN No. 48, The Tax Cuts and Jobs Act of 2017, ASU 2013‐11, ASU 2018‐02, ASU 2019‐12, and ASU 2023‐09. Finally, we'll examine the income tax reporting requirements issued by the IASB.

Historical Perspective

Congress enacted the first income tax law in 1913 and until the early 1940s normal accounting practice was to recognize income tax expense for financial accounting purposes as the amount of income taxes payable. During that period, income taxes ...