Income Tax Provision 101: Class Is in Session

February 16, 2022

By Adam Firestone

Income taxes are often one of the largest, if not the largest, expenses on the P&L. For non-tax professionals, the income tax provision can be overwhelming, but it does not have to be.

Tax law, accounting standards and disclosure requirements continue to grow more complex but, rest assured, the basic concepts of the tax provision remain the same. In our recent webinar, Tax Partners Allie Colman and Tom Cardinale briefed the audience on the fundamentals of accounting for income taxes and key considerations for the 2021 year-end provision.

ASC 740 governs how companies recognize the effects of income-based taxes under U.S. GAAP. Below are the key aspects to consider when preparing or reviewing an income tax provision.

Objectives

To determine the income tax expense or benefit, taxes payable or receivable, and deferred tax asset or liability balance as of the balance sheet date.

Fundamentals

  • Current Provision – This the best estimate of what taxes the company will need to pay. This includes pre-tax book income, permanent differences and temporary differences.
  • Deferred Provision – The deferred provision is comprised only of temporary differences. The deferred provision accounts for taxes today that you expect to pay tomorrow.
  • Rate Reconciliation – The rate reconciliation is a step-by-step guide to determine why the effective tax rate per the financial statements is different from the statutory rate. Common reconciling items include permanent differences, credits and state taxes.

Footnote Disclosures

  • Components of income tax expense, including current and deferred, by jurisdiction.
  • Deferred table to disclose the balance of your deferred tax assets, liabilities and valuation allowance as of the balance sheet date.
  • The amount and expiration period of net operating losses and tax credits.

Unique to 2021

Comprehending these fundamental concepts is the key to understanding the income tax provision. While these concepts remain, a few considerations unique to the 2021 year-end that you should be thinking about today are (1) taxability of PPP loan forgiveness; (2) payroll tax deferral under the CARES Act; (3) state tax nexus considerations of the remote work environment; and (4) deductibility of business meals, increased to 100% for restaurant meals.

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