What is a tax provision?
A income tax provision is the total income tax expense for the reporting period. This includes income taxes from the federal, state, local and foreign governments. ASC 740 Income Tax Provision includes current and deferred income taxes. Amphitrite Advisory ASC 740 believes that understanding our clients’ income tax processes, goals, gaps, expectations, and their thoughts is the best method to help them. A business that is dedicated to excellence in every aspect of their business and operates optimally is the ideal customer for us. We’re more successful when you’re satisfied!
Current income tax expense (benefit), includes income tax payable (receivable), for the current period, based on current tax law applying to current period loss or taxable income.
The future tax expense (benefit), also known as deferred income tax expense, is the expected future tax expense (benefit), resulting from activities in past or current periods. These benefits (future expenses) are caused by temporary differences in tax and book values for certain items.
ASC 740 is applicable to all entities, but only to entity-level taxes. Only jurisdictions with income-based taxes at the entity level can have passthrough tax provisions. Therefore, the ASC 740 provision to income taxes is usually only applicable to C-corporations.
How can a corporation calculate its income-tax provision under ASC740?
To get the total ASC740 income tax provision, add the current and deferred tax provisions.
The current income tax provision is equal to the taxes reported on current-year returns, if any, plus adjustments for previous year returns. The current income tax provision cannot exclude any uncertain tax benefits, unless the relevant tax authority is more likely to maintain the underlying situation.
Before filing the tax return, companies may use the current income tax provision to prepare financial statements. This calculator can be used to estimate the current income tax provision.
- Begin with pretax GAAP income.
- Negative permanent differences can be added or subtracted.
- Add or subtract the net difference in temporary differences.
- Subtract usable loss carryforwards.
- Multiply this result by the tax rate (21% federal tax on Ccorporations).
- Subtract usable taxes credits, tax credit carrying forwards, and the benefit from current year loss carrybacks.
What is the difference between permanent and temporary?
Permanent differences between GAAP income and tax amounts are not reverseable. Permanent differences exist between GAAP income and tax. Nondeductible expenses, GAAP income, and certain credit effects are all exempted from tax. Federal tax includes interest on municipal and state bonds (tax-exempt income), entertainment costs (nondeductible expenses) and fines (nondeductible expenses). Permanent differences can affect the current provision, and thus the effective tax rate according to ASC 740. Because they are not reverseable in the future, they do not create deferred taxes assets or liabilities.
In the future, temporary differences between GAAP tax amounts and tax amounts will be reversed. Consider an asset that has a 10 year useful life, no salvage value, and costs $100,000. To claim $100,000 tax depreciation, a company employs bonus depreciation rules. The straight-line method is used for GAAP purposes. This results in $10,000 of book deduction. Temporary difference of $90,000.
What disclosures and reporting are required by ASC 740?
The income statement will contain the total ASC 740 provision regarding income tax. Companies can choose to report current or deferred tax expense separately on their income statement.
ASC 740 requires that the balance sheet net all deferred taxes assets and liabilities that can be offset for tax purposes. This usually means they are related to the same jurisdiction for one entity. Companies must however disclose the total amount of deferred and unpaid tax liabilities.
