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On its year 1 financial statements, Seatax Corporation, an accrual-method taxpayer, reported federal income tax expense...

On its year 1 financial statements, Seatax Corporation, an accrual-method taxpayer, reported federal income tax expense of $570,000. On its year 1 tax return, it reported a tax liability of $650,000. During year 1, Seatax made estimated tax payments of $700,000.

What book–tax difference, if any, associated with its federal income tax expense should Seatax have reported when computing its year 1 taxable income? Is the difference favorable or unfavorable? Is it temporary or permanent?

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Answer #1

Corporations reconcile from book income to taxable income by making adjustments for book-tax differences.

In this case, Seatax deducted $570,000 of federal income tax expense to determine its book income (note that it did not deduct its actual tax liability).

Because corporations are not allowed to deduct any federal tax expense on their tax returns, Seatax will make a permanent $570,000 unfavorable book-tax difference when computing its year 1 taxable income.

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