WALL STREET PREP ADVANCED
ACCOUNTING EXAM TEST BANK
EXPERT REVIEWED QUESTIONS
ANSWERS
◉ What are deferred tax liabilities (DTLs)? Answer: Deferred tax
liabilities ("DTLs") are created when a company recognizes a tax
expense on its GAAP income statement that, because of a temporary
timing difference between GAAP and IRS accounting, is not actually
paid to the IRS that period but is expected to be paid in the future.
DTLs are often related to depreciation. Companies can use
accelerated depreciation methods for tax purposes but elect to use
straight-line depreciation for GAAP reporting. This means that for a
given depreciable asset, the amount of depreciation recognized in
the earlier years for tax purposes will be greater than under GAAP.
Those temporary timing differences are recognized as DTLs. Since
these differences are just temporary - under both book and tax
reporting, the same cumulative depreciation will be recognized over
the life of the asset - at a certain point into the asset 's useful life, an
inflection point will be reached where the depreciation expense for
tax reporting will become lower than for GAAP.
◉ What are deferred tax assets (DTAs)? Answer: Deferred tax assets
("DTAs") are created when a company recognizes a tax expense on
,its GAAP income statement that, due to a temporary timing
difference between GAAP and IRS accounting rules, is lower than
what must be paid to the IRS for that period. These net operating
losses ("NOLs") that a company can carry forward against future
income create DTAs.
For example, a company that reported a pre-tax loss of $10 million
will not get an immediate tax refund. Instead, it'll carry forward
these losses and apply them against future profits.
However, under GAAP, the tax benefit will be recognized from a
presumed future tax refund immediately on the income statement,
and this difference gets captured in DTAs. As the company generates
future profits and uses those NOLs to reduce future tax liabilities,
the DTAs gradually reverse.
Another reason for DTAs is the differences between book and tax
rules for revenue recognition. Broadly, tax rules require recognition
based on receiving cash, while GAAP adheres rigidly to accrual
concepts.
◉ What impact did the COVID-19 Tax Relief have on NOLs? Answer:
Under the Coronavirus Aid, Relief, and Economic Security (CARES)
Act, NOLs that arise beginning in 2018 and through 2020 could be
carried back for up to a maximum of five years. The rules for
claiming tax losses were changed to assist individuals and
corporations negatively impacted by the pandemic. For tax years
, beginning after 2020, the CARES Act would allow NOLs deduction
equal to the sum of:
1. All NOL carryovers from pre-2018 tax years 2. The lesser amount
between 1) all NOL carryovers from post-2017 tax years or 2) 80%
of remaining taxable income after deducting NOL carryovers from
pre-2018 tax years
Previously, NOLs arising in tax years ending after 2017 could not be
carried back to earlier tax years and offset taxable income. NOLs
arising in tax years post-2017 could only be carried forward to later
years. But the key benefit was that the NOLs could be carried
forward indefinitely until the loss was fully recovered (yet limited to
80% of the taxable income in a single tax period).
◉ What are the notable takeaways from Joe Biden's proposed tax
plans? Answer: i. The corporate tax rate will rise from the Trump
Era's Tax Cuts and Jobs Act ("TCJA") rate of 21% to 28%; estimated
to increase the government's tax revenue from $2 trillion to $3
trillion over the next decade.
ii. The top tax rate for individuals with a taxable income of $400k+
will rise from 37% to 39.6%.
iii. A 12.4% payroll tax will be imposed on those earning $400k+ and
to be split evenly between employers and employees.
ACCOUNTING EXAM TEST BANK
EXPERT REVIEWED QUESTIONS
ANSWERS
◉ What are deferred tax liabilities (DTLs)? Answer: Deferred tax
liabilities ("DTLs") are created when a company recognizes a tax
expense on its GAAP income statement that, because of a temporary
timing difference between GAAP and IRS accounting, is not actually
paid to the IRS that period but is expected to be paid in the future.
DTLs are often related to depreciation. Companies can use
accelerated depreciation methods for tax purposes but elect to use
straight-line depreciation for GAAP reporting. This means that for a
given depreciable asset, the amount of depreciation recognized in
the earlier years for tax purposes will be greater than under GAAP.
Those temporary timing differences are recognized as DTLs. Since
these differences are just temporary - under both book and tax
reporting, the same cumulative depreciation will be recognized over
the life of the asset - at a certain point into the asset 's useful life, an
inflection point will be reached where the depreciation expense for
tax reporting will become lower than for GAAP.
◉ What are deferred tax assets (DTAs)? Answer: Deferred tax assets
("DTAs") are created when a company recognizes a tax expense on
,its GAAP income statement that, due to a temporary timing
difference between GAAP and IRS accounting rules, is lower than
what must be paid to the IRS for that period. These net operating
losses ("NOLs") that a company can carry forward against future
income create DTAs.
For example, a company that reported a pre-tax loss of $10 million
will not get an immediate tax refund. Instead, it'll carry forward
these losses and apply them against future profits.
However, under GAAP, the tax benefit will be recognized from a
presumed future tax refund immediately on the income statement,
and this difference gets captured in DTAs. As the company generates
future profits and uses those NOLs to reduce future tax liabilities,
the DTAs gradually reverse.
Another reason for DTAs is the differences between book and tax
rules for revenue recognition. Broadly, tax rules require recognition
based on receiving cash, while GAAP adheres rigidly to accrual
concepts.
◉ What impact did the COVID-19 Tax Relief have on NOLs? Answer:
Under the Coronavirus Aid, Relief, and Economic Security (CARES)
Act, NOLs that arise beginning in 2018 and through 2020 could be
carried back for up to a maximum of five years. The rules for
claiming tax losses were changed to assist individuals and
corporations negatively impacted by the pandemic. For tax years
, beginning after 2020, the CARES Act would allow NOLs deduction
equal to the sum of:
1. All NOL carryovers from pre-2018 tax years 2. The lesser amount
between 1) all NOL carryovers from post-2017 tax years or 2) 80%
of remaining taxable income after deducting NOL carryovers from
pre-2018 tax years
Previously, NOLs arising in tax years ending after 2017 could not be
carried back to earlier tax years and offset taxable income. NOLs
arising in tax years post-2017 could only be carried forward to later
years. But the key benefit was that the NOLs could be carried
forward indefinitely until the loss was fully recovered (yet limited to
80% of the taxable income in a single tax period).
◉ What are the notable takeaways from Joe Biden's proposed tax
plans? Answer: i. The corporate tax rate will rise from the Trump
Era's Tax Cuts and Jobs Act ("TCJA") rate of 21% to 28%; estimated
to increase the government's tax revenue from $2 trillion to $3
trillion over the next decade.
ii. The top tax rate for individuals with a taxable income of $400k+
will rise from 37% to 39.6%.
iii. A 12.4% payroll tax will be imposed on those earning $400k+ and
to be split evenly between employers and employees.
