A profitable company can report income tax expense exceeding its unpaid tax bill because payments and future tax consequences affect different accounts. Under United States generally accepted accounting principles (U.S. GAAP), the provision recognizes both current obligations and deferred consequences.
- Current tax expense measures taxes attributable to the current return, including applicable credits and recognized adjustments for uncertain positions.
- Deferred tax expense reflects recognized changes in future tax consequences; changes producing a benefit reduce total tax expense.
- Current taxes payable equal the recognized current obligation less payments applied against that obligation; excess refundable payments create a tax receivable.
- Tax basis is an asset's or liability's amount attributed to it under the applicable tax rules, which may differ from its financial reporting carrying amount.
To prepare journal entries, the preparer first calculates current tax, then measures ending deferred balances and assesses their realization. Beginning balances and the location of each underlying transaction determine the adjusting entries.
HIGH-FREQUENCY: The provision separates tax expense, ending deferred balances, and the unpaid or refundable current balance. A payment changes the last answer without changing tax expense.
Common mistakes
- Using the annual difference. Harlowe's $60,000 excess tax depreciation is a movement; the $160,000 ending property difference produces a $40,000 DTL.
- Expensing the unpaid balance. Harlowe's $26,500 payable does not replace its $106,500 current tax expense.
- Charging all deferrals to earnings. Harlowe's $16,000 net deferred-liability increase includes $10,000 assigned to OCI, leaving $6,000 in continuing operations.
Bottom line
- Current tax expense reflects taxable income, permitted loss use and usable credits; payments determine the remaining payable or refundable amount.
- Asset carrying amounts above tax basis create DTLs and amounts below tax basis create DTAs; liability relationships reverse those directions.
- Permanent differences create no deferred balances, while temporary differences are measured from cumulative ending book and tax bases.
- Deferred taxes use applicable enacted reversal rates without discounting; enacted-rate remeasurement enters continuing operations.
Exam shortcut
The preparer separates current-year income adjustments from cumulative ending basis differences, then places payments in a separate settlement calculation. Each reversal period uses its enacted rate. A rate-change comparison holds the differences constant and compares deferred balances under the old and new rates. The allowance entry adjusts the existing balance to the required ending allowance, using income sources matching the loss's character and usable period.
The full lesson (about 7,429 words, 50 min read) adds 5 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.D1
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