Accountingfor Income Taxes
Accountingfor Income Taxes
Inthe recent times, it has become an essential element for one tounderstand the difference between credits and tax deductions isfundamental, as the tax strategies that one adopts can be favoredover another, and in turn give substantially different tax savings.In simplified terms, ‘incometax’,is a tax that a government imposes on the financial income that isgenerated by numerous entities within their jurisdiction (Graham etal, 2012). In each and every year, both business and individual aresupposed to file tax returns, this helps to determine whether theyowe any taxes to the government or else, they are legible for taxrefund. To any government, the income tax is a key source of funds,to fund its projects and serve the public. Income tax can also bereferred to as the annual charge that is charged to both unearned andearned income. Many governments impose what is known as progressiveincome taxation’(Phillips, 2014). This is designed to evenly distribute wealth withinthe population. This means that higher income earners pay a highertax rate compared to low earning individuals. Income tax comes in twocategories personalincome tax,that is imposed on individuals, partnerships, sole-proprietorship,and households, and the corporationincome tax,that is levied on net earnings received by corporate firms (Chen etal, 2013).
Accountingfor income taxeshas in turn become an essential element in any country operations.Despitebeing a complex issue, the income tax accounting gives the guidelineson how to calculate the taxes on peoples and organization’s income(Ayerset al, 2009).The accounting model concerned with income taxes has been inexistence for quite some time now. Accounting for income tax providesthe standards towards the calculations involving income tax for bothcorporations and individuals. With the numerous changing aspects ofthe income tax accounting, the discipline has become morecomplicated. These varying factors have contributed to theinterpretation of the accounting model for income taxes to bechallenging (Phillips,2014).
IncomeTaxes Accounting (purposes)
Theaims of accounting-for-income-taxes are varied one is that, it helpsto recognize the total of taxes that are owed or refundable for anycurrent financial year. Accounting for income taxes also helps todefer tax liabilities/assets for the prospect tax significances ofmeasures that have been accepted in an organizations financialdeclarations or tax revenues (Godfrey et al, 2014). Moreover, it alsohelps understand the differences between tax, accounting andfinancial accounting. In addition, it helps to understand the impactsof income taxes such as net operating losses, changes in tax rates,as well as valuation allowances. Finally, it helps to interpretincome tax disclosures (Carlon et al, 2013).
Differencebetween ‘Pretax Financial and ‘Taxable’ Income
Ina brief definition, ‘pre-taxfinancial income’refers to an income that is accumulated before the income taxes arepaid for it. On the other hand, TaxableIncomeamounts to the amount of income used when figuring income tax that abusiness or an individual owes. Another major difference between thetwo is that, pre-tax financial income is typically used bybusinesses, while taxable income is used by both people and business.The difference between financial and taxable income are bothpermanent and temporary differences. The temporary difference betweenthe two means that, the accounting items used to calculate each ofthe taxes during a particular financial year is interchanged. Forexample, if an item is counted in pretax financial income, in oneyear, and not in taxable income, then on a future tax return, thesame item will be counted in taxable income and not in pretax income.
Permanentdifferences between the two types of taxes refers to some categoriesof income being always part of the total of either pretax financialincome or taxable income, but in this case it’s not involved whencalculating both values at the same time. Finally, there is adifference in totals. The existence of permanent and temporarydifferences leads to the difference in the totals of both thefinancial income and taxable income. When the taxable income balanceis more that pretax financial income, then this means that, taxobligations are higher and vice versa hold true.
Purposeof deferred-tax-asset valuation allowances
Valuationallowance can be referred as an item on a business’s balance-sheetthat counterbalances all or a percentage of the cost of acompany`s deferredtax assets. This is due to the element that, the business doesn`texpect it will be able to realize this value in a given financialperiod. During a financial period, a company may expect not to beable to realize the paybacks of its deferred tax assets, and henceapplying the valuation allowance feature. Valuation allowances aspectgreatly depends on management assumptions, such as how high theprofits will be. Company management today uses the valuationallowance to manipulate or manage its earnings (Sansing,2014).
Classificationof Deferred Taxes
DeferredTaxaccounting comes along when companies prepays or postpones payment oftaxes on profits realized within a particular financial period.Deferred taxes rise when the income tax expenses, differs from theincome tax liability. There are two classes of deferred taxes, whichare the DeferredTax Liabilityand Deferred-Tax-Assets.Deferred/delayed tax liabilities are realized when tax reliefs aregiven before an accounting expenditure, or else when income isaccrued, but failed to be taxed until when it has been received. Forexample, when a company takes accelerated depreciation with referenceto the tax laws, in extra of devaluation as accepted by the standardsin financial accounting. On the other hand, there is the ‘DeferredTax Assets’,which is experienced when tax relief is offered once an expense istaken for an accounting determination (Witner & Krumwiede, 2014).For example, a business entity may suffer tax fatalities and becapable of carrying forward the losses in order to reduce the valueof taxable income in the future years.
Inconclusion, subject to certain defined exemptions and exceptions,income tax has been there over time and is chargeable on all incomerealizing to the individuals, partnershipsand unincorporated bodies. The current tax system in the UnitedStates is based on the revenue act of 1913. The accounting for incometax has since become an essential and integral element both toindividuals and business entities. There are various objectives ofaccounting for income taxes, as well as the docket being diverse withdifferent other terms such as financial and taxable income, deferredtax assets and liabilities, valuation allowances among others whichplay a key element in understanding the aspect of ‘accounting forincome taxes to business organizations.
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