- What Papers Do I Need for a Tax Return?
- What Is the Difference Between Net Income and Profit Margin?
- Recurrent Budget vs. Capital Budget
- How to Reverse Differences in Tax Accounting
- How to Find the Net Income on a Statement of Owner's Equity
- The Difference Between FASB, GASB & Statement of Cash Flows
Every company faces the obligation to file income taxes at the end of the year. Sometimes it reports a profit and needs to pay the tax. Other times the company reports a loss and pays no tax. A provision for income tax considers both possibilities and impacts the company’s net income calculation. The provision for income tax appears on the company’s final income statement. The final income statement represents the version that the company publishes and distributes to investors and creditors. The company needs to consider differences between financial and tax accounting when it calculates the provision for income tax.
Read the preliminary income statement. Locate the net income.
Identify any permanent differences on the income statement. Permanent differences refer to transactions that the company records differently for financial accounting than for tax accounting. These include revenues or expenses that are deductible for one set of accounting books, but not the other.
Write down the net income. Deduct permanent differences that increase revenue or decrease expenses on the financial accounting income statement. Add permanent differences that decrease revenue or increase expenses on the financial accounting income statement.
Identify any temporary differences. Temporary differences refer to transactions that the company records at different times for financial accounting than for tax accounting. These include revenues or expenses that occur at a different time than the company pays for them.
Create a schedule for each temporary difference. Write down each transaction and the time period when it impacts tax accounting. Compare this amount to the amount recorded on the income statement.
Write down the net income adjusted for permanent differences. Deduct temporary differences that increase revenue or decrease expenses on the financial accounting income statement. Add temporary differences that decrease revenue or increase expenses on the financial accounting income statement.
Keep the temporary difference schedules, and update them each year. This eliminates the need to recreate the schedules every year.
The provision for income taxes and the income tax paid refer to two different classifications. The provision for income taxes refers to money which the company has not paid yet and owes to the Internal Revenue Service.