Question

What are the goals of Income Tax Accounting?

What are the concepts and accounting of Income Tax Accounting?

What are the challenges and conflicts of Income Tax Accounting?

References: Chapter 15 Income Taxes and Financial Accounting

CHAPTER HIGHLIGHTS Students should come away from this chapter with an appreciation of the complexities bearing upon financial accounting stemming from the federal government's role in the taxation process and fiscal policy. It should also be clear that income tax allocation presents extremely difficult problems of allocation. A viable means of viewing the income tax allocation problem is by means of comparing and contrasting the numerous positions on the question. Exhibit 14-6 can be used as a frame of reference for evaluating the various positions. The question of the deferred credit position of APB Opinion No. 11 and the definition of liabilities in SFAC No. 6 could be a fruitful approach. A full view of the complexities of income tax allocation can be gleaned from the discussion using the example of accelerated tax depreciation versus straight-line for financial reporting The heart of the chapter will probably be on how SFAS No. 109 works and its changes from its predecessor, SFAS No. 96. The change relative to the recognition of tax-loss carryforwards is also discussed. The discounting of deferred tax liabilities is also discussed and illustrated. The investment tax credit, now on the internet, is largely of historical interest at the present time Some comparisons can be made between investment tax credit and income tax allocation approaches. For example, the net-of-tax approach to income tax allocation and the reduction of asset cost approach for the investment tax credit have the similarity of reducing the cost of the asset. The investment tax credit was previously repealed two times, but it always seems to come back because it is a good macroeconomic tool for stimulating economic investment.

Answer 1

To understand all the question, first we need to understand the basis of income tax accounting:

Accounting is basically concerned with the maintenance of the records. Income tax accounting is slightly different from the financial accounting in the sense that the financial records are made for the investors but the income tax accounting is required to determine the amount of income tax we need to pay to the authorities as per the income tax rules.

The Goals of the Income Tax Accounting:

1. To prepare the accounts as per the Income tax rules prevailing in the country.

2. To maintain the record, to determine the amount of income tax payable.

Concepts of Income Tax Accounting:

• Temporary differences. A company may record an asset or liability at one value for financial reporting purposes, while maintaining a separate record of a different value for tax purposes. The difference is caused by the tax recognition policies of taxing authorities, who may require the deferral or acceleration of certain items for tax reporting purposes. These differences are temporary, since the assets will eventually be recovered and the liabilities settled, at which point the differences will be terminated. A difference that results in a taxable amount in a later period is called a taxable temporary difference, while a difference that results in a deductible amount in a later period is called a deductible temporary difference.

• Carrybacks and carryforwards. A company may find that it has more tax deductions or tax credits (from an operating loss) than it can use in the current year’s tax return. If so, it has the option of offsetting these amounts against the taxable income or tax liabilities(respectively) of the tax returns in earlier periods, or in future periods. Carrying these amounts back to the tax returns of prior periods is always more valuable, since the company can apply for a tax refund at once. Thus, these excess tax deductions or tax credits are carried back first, with any remaining amounts being reserved for use in future periods.

Accounting for Income Tax

+/-	Create a tax liability for estimated taxes payable, and/or create a tax asset for tax refunds, that relate to the current or prior years
+/-	Create a deferred tax liability for estimated future taxes payable, and/or create a deferred tax asset for estimated future tax refunds, that can be attributed to temporary differences and carryforwards
=	Total income tax expense in the period

Challenges and Conflicts in Income Tax Accounting

1.  Differences of Profit with the financial accounting.

2. Different personnel required for the preparation of Accounts for Income tax rules, so company need to invest in the salary of that personnel.

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