hi, I’ve never fully understood this. Read it a couple of times but I don’t think it’s very well explained. All the DTA and DTL is fine however i always get stuck on these questions that talk about permanent and temp differences. This is my understanding of it, temp differences occur (mainly) due to depreciation differences between tax and accounting and perm differences have no affect on tax expense or taxes payable but instead affect effective tax rate. If that’s all correct then my question is; where is the statuatory tax rate used and where is the effective tax rate used?

A permanent tax difference should be thought of as a situation where something is reported on the income tax filing which is not reported on the income statement tax, or vice versa. For instance, interest earned on a tax-exempt bond will not be reported for IRS purposes as it is exempt, but for GAAP reporting, it is included in income. This difference will always exist – never be corrected, unlike depreciation which (potentially) balances out over time.

thanks however where is the statuatory tax rate used and where is the effective tax rate used?

Statutory is for exact tax calcs, effective is quick and dirty. Example: Taxable income is $100 and the statutory tax rate is 10% on the first $50, and 20% on amounts over $50. Thus taxes are (50*.1+50*.2) or $15. Your effective tax rate is $15/$100 or 15%. The other concept is incremental tax rate. The next dollar earned would be taxed at that top bracket, or 20%. An example with a permanent difference would be where you take the info above and assume that the company had a $10 deduction that was NEVER deductible for tax purposes, that must be added back for tax return purposes. The you would have $60 ($50 plus that $10) taxed at the highest 20% bracket, so your taxes would be $17 and the effective rate 17%. If you understand these basic concpets and read the questions carefully, you’ll be fine.

that’s a good explanation. thanks, I’m pretty sure I get it now. Well… untill i see the next tax q where I think WHAT THE F***!

Another Tax Q I just don’t get: Xanos corp faced 50% marginal tax last year. And showed: DTA = $1000 DTL = $5000 Based only on this information and the news that the tax rate will decline to 40%, Xanos corp’s: DTA will be reduced by $00 and DTL reduced by $2000 DTL reduced by $1000 and income tax expense reduced by $800 DTA will be reduced by $200 and income tax expense reduced by $1000 INcome tax expense reduced by $800 and TFL by $2000 In all the topics in this level I am finding this to be the worst. I just can never get any of these questions right. Can someone please help me out. Thanks

is it c?

B

sorry first answer is supposed to read: DTA will be reduced by $400 and DTL reduced by $2000

mambovipi DTA = $1000 DTL = 5000 Based only on this information and the news that the tax rate will decline to 40%, Xanos corp's: Look at it as Net DTL for the year was 4000 at 50%. This would have meant taxes would have been increased by 4000. bcos: Tax Expense = Tax Payable + Delta DTL - Delta DTA. Since we considered Net DTL --> Delta DTA = 0 (for simplifying) 50% became 40% tax rate. So Delta DTL now is 4000/.5 * .4 = 3200 This means a Tax saving of 800$. Given that B is the only choice with the 800 reduction in Tax expense, that is your answer. DTL incidentally was 5000 @ 50%, @ 40% will become 4000. So DTL reduces by 1000 which is also part of answer choice B. CP

thanks for explanation however I still have a few questions: can you please explain the following: ------------------------------------------------------ So Delta DTL now is 4000/.5 * .4 = 3200 ------------------------------------------------------ and ------------------------------------------------------ DTL incidentally was 5000 @ 50%, @ 40% will become 4000. ------------------------------------------------------ Thanks for your help!

------------------------------------------------------ So Delta DTL now is 4000/.5 * .4 = 3200 ------------------------------------------------------ Whenever tax rate changes - the Delta DTL amount which had been calculated at a previous tax rate, has now to be recalculated at the new tax rate, which then affects the Tax expense. So previous Delta DTL with 50% tax rate was 4000$. Now tax rate is 40%. So the recalculated DTL is: 4000/ .5 * .4 = 3200. This means the difference (3200 (new) - 4000 (orig)) on the DTL (Which is -800$ would be reduced from the Tax expense for this year --> which means a tax saving of 800$. Remember on all the above calculations, we used the Net DTL amount. ------------------------------------------------------ DTL incidentally was 5000 @ 50%, @ 40% will become 4000. ------------------------------------------------------ Original full DTL amt. was 5000. (@ 50% tax rate). At the 40% tax rate --> this would become 5000/.5 * .4 = 4000$. Hope this helps. CP

thanks so much for your help. that really clears it up!

"A permanent tax difference should be thought of as a situation where something is reported on the income tax filing which is not reported on the income statement tax, or vice versa. " PERFECTLY STATED. recall that if ITP > ITE, you get a DTA if ITP < ITE, you get a DTL.

Going back to the first Q: Yuri analyses international clothing manufacturers and is particularly intersted in POI Corp as the company has an effective tax rate rate of 29.6% and statutory rate of 35%. The cause of this difference is most likely: warranty expense accelerated dep temp difference earnings of POI’s albanian subsidary. the answer is: E. I actually just looked for the odd one out. I saw E was the only one that didn’t create a temp difference. But i want to understand the Q a bit more. Can someone please explain the answer properly.

??

I think sometime subsidiaries declear a divident to a parent company but never really pays it and as such it sort of become a reinvestment in the subsidiary and yet it was already booked as income in the books of the parent company. this causes a permanent difference

Warranty expense and accelerated depreciation are both temporary differences affecting the current and future taxes: the warranty expense creates DTA (for tax purposes the deduction for warranty expense is made when it actually incurred, not in the amount estimated and reported/deducted on the income statemet, so actually my taxes paid are currently higher because I would have a higher taxable income) and accelerated depreciation creates a DTL (for tax purposes I am deducting more than I deduct on the Income statement, so in the future I will no longer have a deduction for depreciation when the asset has been depreciated to its salvage value for tax reporting and therefore taxes payable would be higher because of a higher taxable income). (a) and (b) are subsets of ©. I would go with C.

LOL… i just saw I wrote the answer as E. I meant D. it’s been a long day. What i was trying to get at is the difference between the statuatory and effective tax rate. So what does that actually tell me? The statuatory tax rate is what I’m being charged and effective is what I’m paying. Is that correct?

Statutory tax = Taxes payable/Taxable Income, both pertain to the tax statement: Taxable income = income, as determined by the tax code and subject to the statutory tax, on the tax return Taxes payable = tax liability based on the taxable income from current priod’s tax return Effective tax rate = Income tax Expense/Pretax income Pretax income = income before taxes, on the income statement, prepared using GAAP Income tax Expense = expense based on the pretax income of the current period’s income stratement Income Tax Expense = Taxes Payable + changes in DTL - changes in net DTA