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• Catherine Duffy: Okay, welcome back, so here are we to get started with step one of the

• calculation for the current income tax expense. When we're doing tax accounting, we're essentially

• looking for two different numbers. We're looking for the current tax expense for the year and

• we're looking for the deferred tax expense for the year and both of those could be a

• benefit, so if it ends up being a debit, it's going to be expense. If it's a credit, it's

• a benefit through the income statement, so we're going to start with the first calculation,

• being the calculation of the current tax. You could do the deferred tax first, but I'm

• going to do the current tax expense calculation first.

• I like to call this one usually step one. Okay, so step one is calculation of current

• income tax expense. To calculate the current expense, so this is the tax that you actually

• have to pay this year. We always start with our accounting income and adjust it, just

• like we would on a tax return. Adjust it to the taxable income figure, which is the figure

• that you're taxed, that you have to pay is based on. We'll start with that accounting

• income for 2016 and that was 80,000, so that's our starting point. Then we're going to adjust

• this just like you would on a tax return, you're going to adjust this for things that

• are different between the accounting income and what the taxes are based on. There are

• lots of things that are different in the tax act between accounting and tax and given the

• facts that I gave you originally related to this situation, we've got a few different

• things and we usually classify those in this rough calculation here, splitting it between

• the permanent and the differences that are not permanent, or time indifferences.

• Let's start with the permanent differences. In the facts that I gave you, there were three

• things that happen to be permanent differences, they will never be taxed the same way they

• are recorded for accounting. One of them is the dividend income, so we have dividend income

• that we received from Canadian corporations of 8,000 dollars, so that's included in that

• accounting income figure. We don't have to pay tax on that. The tax laws say we don't

• have to pay tax on that. I could get into a long explanation of why we don't have to,

• but just the fact is the tax law says we don't have to pay tax on that 8,000 dollars because

• it's already been taxed in the corporation that paid the dividend.

• We subtract that from the accounting income to lower how much we're going to have to pay

• tax for this year because we don't have to pay tax on the 8,000 anymore. Another item

• that is considered a permanent difference is fines that we expensed, so we paid some

• pines and we expensed them in this 80,000 dollars this year, they were for 3,000 dollars

• and the tax law says that you are not allowed to expense for taxes anyways. You can't deduct

• those 3,000 dollars worth of fines. You're allowed to as legitimate business expense

• because you did pay it, you're allowed to expense it for business, so it's okay that's

• it's subtracted in the accounting income, but it's not okay for calculating your taxes

• owning, so you add it back.

• The other one in the example that I gave you was meals and entertainment expense, so M

• and E for short. The tax law currently says that 50% of your meals and entertainment expense

• are not allowed to be deducted for tax purposes. We had meals and entertainment expense of

• 7,000 dollars I believe, so 3,500 dollars is not allowed to be expensed for tax, so

• we'll add that back into that accounting income. Those are our three permanent differences.

• Now there are other differences though that are different between accounting and tax,

• but only in this particular year, so it's saying that it's something that's in this

• accounting income or not in this accounting income, but should be in the taxes figure

• for calculating the taxes that are owing, so a couple of examples of those and we'll

• call those timing differences or temporary differences.

• One of those is related to depreciation. There is depreciation that has been expensed of

• 80,000 dollars in there. That is not a legitimate expense for tax purposes, however, for tax

• purposes you're allowed to take capital cost allowance, or CCA. The CCA for this year for

• 2016 works out to 3,000 dollars and that can be subtracted for tax purposes, so let's just

• take a look at these numbers here, so this particular one was from the accounting net

• book value where we depreciated 2,000 dollars per year. Whereas this was related to the

• undepreciated capital cost allowance that ended the year last year, 2,500 dollars and

• I think it had a tax class rate of 12%, so 2,500 dollars times 12% that was the amount

• that was allowed deducted for tax purposes. Those two things will not be the same this

• year, but eventually that whole asset that was purchased, the whole property, plant,

• and equipment asset, eventually for accounting it will all have been expensed down to a net

• book value of zero and eventually for tax, in theory anyways. It will eventually all

• get deducted as CCA over many years to the point where it gets down to a class value

• of zero.

• Eventually they both do get fully expensed, both for accounting and for tax, but in any

• given year, there can be differences. In this year, you can see that there is a difference

• of a 1,000 dollars, where you can have more deduction for tax than you can for accounting

• of an additional 1,000 dollars. Another timing difference was the warranty. This year we

• actually spent 8,500 dollars repairing some products that we had sold in prior years and

• we had accrued as a warranty liability. The entry when we did this, when we paid for these

• repairs to these products would have been a debit to the warranty liability and a credit

• to cash or accounts payable or whatever inventory that we had, so 8,500 dollars. You can see

• neither, this entry didn't do anything to our income statement, so it had no effect

• on our accounting net income. The entire warranty had been expensed in the prior years, but

• this year when we actually spent some money, we just drew down the liability.

• Well for tax purposes, you're only allowed to deduct this when you actually pay the warranty

• and I almost had a little mistake here, can't forget the brackets. You are allowed to subtract

• this or deduct the warranty when you actually pay it, so this is the actual amount spent,

• so this can be deducted for tax purposes this year. Okay, so that's warranty.

• Another item we had was our restructuring liability. This accrual that we made of 10,000

• dollars, so that restructuring liability, why are we adding it back? We're adding it

• back because when we recorded this liability, we would have expensed it, so debit the expense,

• credit the liability. That expense is therefore in that net income calculation, but the tax

• laws say that you can't expense for tax purposes a liability that's just an accrual and hasn't

• actually been incurred. We're going to add it back this year and then in the future years,

• next year or whenever we do get around to restructuring the plant, then we'll deduct

• what we actually spent, so it's very similar to this warranty situation, so we'll add back

• this expense. We've expensed for accounting for now, but in future years we're going to

• deduct it.

• Then the last one that we had that was a timing difference was related to the rental income

• that we had accrued, so we had accrued 6,000 dollars worth of rental income. The journal

• entry when we accrued the rental income was a debit to some type of receivable, so it

• could be rent receivable or something, I'll just say accounts receivable, for simplicity.

• The entry we recorded in 2016 was a debit to the accounts receivable and a credit to

• rental income, 6,000 dollars, so this rental income value is included in this net income

• of 80,000 dollars, but we haven't yet received the money for it. The tax laws says that we

• don't have to pay tax on this 6,000 dollars until we actually get the money from our customer,

• even though for accounting we needed to accrue it, we don't have to pay the tax on it.

• We're going to subtract it this year and then next year when we do collect this accounts

• receivable, then we're going to have to add it back to include it in our income for tax

• purposes. These are all the total permanent and timing differences, when you do this calculation,

• technically you don't need to split it up between the permanent and the timing differences.

• The two categories there, this is just rough work. The reason it's a good idea to split

• things between permanent and timing differences because we're going to use these timing differences,

• these are going to help give us a clue when we get onto the next stage, step two where

• we do the deferred tax accounting calculation, these are going to give us a clue of the kinds

• of things that we've got floating around that will affect our deferred taxes, so after you've

• identified all of your permanent differences and timing differences, anything that is different

• between accounting income and taxable income for this year, you're going to add them all

• up. You get your taxable income for this fiscal year, and that taxable income will likely

• be, and hopefully will be the same taxable income you get when you do get around to doing

• your tax return.

• Usually you're doing the accounting for taxes well before you get around to actually doing

• the formal tax return, but our expectations are that this is what going to be what your

• taxes payable for this year is based on, going to be based on this taxable income figure

• of 73,000 dollars and you multiply that by the current year's tax rate, so whatever the

• legislation says you have to pay tax on this year and we'll just make an assumption of

• a simple 20% rate times a 73,000 dollars taxable income, this is your current tax expense.

• It's not the whole tax expense for accounting purposes, it's just the current portion, so

• you'll debit that tax expense of 14,600 and you'll credit a current income tax payable

• liability that you have to pay to the government.

• Okay, so that was the competition of the current tax calculation for 2016, we'll have another

• video a little bit later that will summarize all of the journal entries for tax accounting,

• but for now we're finished this calculation and whenever you're ready you can move on

• to the step two calculations of deferred taxes.

Catherine Duffy: Okay, welcome back, so here are we to get started with step one of the

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# Income Tax Accounting (IFRS) | Calculating Current Income Tax Expense - Part 2 of 4

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陳虹如 posted on 2017/06/23
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