Income for financial reporting purposes (book income) and income for tax purposes (taxable income) usually differ. Differences are due to the fact that for financial reporting, firms are required to follow GAAP. However, for tax purposes, firms must follow the Internal Revenue Code. The differences can either (1) permanently differ, in which case there is no deferral, or (2) reverse over time (e.g., straight line depreciation is used for book purposes and MACRS is used for tax purposes) which leads to a temporary difference or deferred tax.
ASC Topic 740, Income Taxes (SFAS 109), requires an asset and liability (balance sheet) approach to recognizing and measuring deferred taxes. This means that Income Tax Expense reporting in a firm’s GAAP financial statements is a function of the current taxes owed to the Internal Revenue Service (Income Tax Payable) and the deferred taxes. To understand the basic concepts of deferred taxes, study this module and the outlines of SFAS 109 and APB 23 (ASC Topic 740).
A. Overview of Deferred Tax Theory
B. Permanent and Temporary Differences Defined
C. Deferred Tax Assets and Liabilities
D. Deferred Tax Related to Business Investments
E. Loss Carryforwards and Carrybacks
F. Financial Statement Presentation of Income Tax
G. Treatment of Selected Temporary Differences
H. Research Component—Accounting Standards Codification
I. International Financial Reporting Standards (IFRS)