What is a tax provision? Simply put, a tax provision is the estimated amount of income tax that a company is legally expected to pay to the IRS for the current year. A tax provision is just one type of provision that corporate finance departments set aside to cover a probable future expense. Other types of provisions a business typically accounts for include bad debts, depreciation, product warranties, pensions, and sales allowances. Show
Tax provisions are considered current tax liabilities for the purpose of accounting because they are amounts earmarked for taxes to be paid in the current year. Although the basic definition sounds simple, what’s not always simple is how to prepare for tax provision calculation in a way that is best for the business while being fast, accurate, and defendable. Estimating each year’s tax provision is not a menial task and can require a great deal of time and effort for corporate tax departments. How provision for tax is calculatedA company’s tax provision has two parts: current income tax expense and deferred income tax expense. To make things more complicated, most accounting departments use Generally Accepted Accounting Principles (GAAP) to calculate their financial position. GAAP procedures differ in important ways from income tax accounting rules. These differences play a major role in the calculation of current and deferred income tax expenses. Current income tax expenseThe current tax expense is the amount of income tax a company will pay for the current year. It is calculated from current earnings and the current year’s permanent differences and temporary differences between the GAAP and income tax rules. The following steps outline how you calculate current income tax provision:
Deferred income tax expenseThe deferred income tax is a liability that the company has on its balance sheet but that is not due for payment yet. This more complicated part of the income tax provision calculates a cumulative total of the temporary differences and applies the appropriate tax rate to that total. It focuses on the deferred effects of income, expenses, NOL, and tax credits. After this calculation, you’ll account for your deferred tax expense on your company’s GAAP balance sheet as an asset or liability depending on whether you will owe tax or will receive a tax benefit in the future. Income tax provision calculation challenges Calculating tax provision is complex and challenging. Corporate tax teams face the following common tax provision calculation issues.
4 steps to improve your tax provision calculation process and resultsWith the right approach, your tax department can get better, faster tax provisioning results, reduce your tax provision obligations, and reduce errors and risks in tax provisioning. Here are the steps to consider:
How tax provision software can help Corporate tax provision software incorporates automation and other technologies that can speed your tax provisioning calculation in several ways. The right tax provision software helps eliminate errors and streamline your tax calculation processes so you can complete filing obligations easily. Tax provision software delivers the tools to help you respond to regulatory changes around the world in nearly any jurisdiction. Tax departments are reporting up to 50% faster processing with some tax provision software, along with other improved results. Tax provision software such as Thomson Reuters ONESOURCE™ Tax Provision gives your organization the ability to balance compliance needs with accurate tax provisioning while ensuring a defendable process. What causes permanent tax differences?A permanent difference is the difference between the tax expense and tax payable caused by an item that does not reverse over time. In other words, it is the difference between financial accounting and tax accounting that is never eliminated. An example of a permanent difference is a company incurring a fine.
What events create permanent differences between accounting income and taxable income?Common examples of permanent differences include entertainment expenses, the 50% limitation on the deduction of certain meal expenses, penalties, social club dues, lobbying expenses, and tax-exempt municipal bond interest.
Which one of the following is a permanent difference between book and taxable income?Permanent Differences
Certain differences in book and tax income will never be reversed. Some common permanent differences include: Penalties and fines –These may be deducted from book income but are not deductible for tax purposes.
What are permanent differences in accounting?A permanent difference is a business transaction that is reported differently for financial and tax reporting purposes, and for which the difference will never be eliminated.
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