ncome tax provisions and Schedule M-1(1) of Form 1120 (Corporation Income Tax Return) bridge the financial accounting world and the Internal Revenue Code. The benefit of understanding an income tax provision and an M-1 is that a preparer can bridge the gap between these two worlds.
This will in turn allow the preparer to talk intelligently with auditors, controllers, chief financial officers, corporate tax consultants, and tax return preparers. Because many controllers and CFOs do not have a tax background, it is important to learn at least the fundamentals of accounting for income taxes for financial accounting purposes.
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This article does not discuss every situation that may arise on an income tax provision. What follows is intended to cover the purpose of a provision and the components of a provision, including deferred tax assets and liabilities as well as effective tax rate. The article concludes with an income tax provision template with the formulas footnoted.
Purpose of an Income Tax Provision
The Financial Accounting Standards Board issued "Statement 109: Accounting for Income Taxes" (FAS 109) in February 1992. The purpose of FAS 109 is to recognize (a) the amount of taxes payable or refundable for the current year and (b) the deferred tax liabilities and assets for the future tax consequences of events that have been recognized in a corporation's financial statements or tax returns. In essence, FAS 109 requires public companies to disclose a reconciliation of the reported amount of income tax expense to the amount of income tax expense that would result from applying domestic federal statutory rates to pretax financial income.
Deferred Tax Assets/Liabilities: How Do They Work?
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