Business and Management
Submitted By lwhitmer
To: Outside CPAs
Date: April 13, 2014
Re: CPA Report
In response to the examination of the subsidiary that has been set up as a corporation, the explanations to the deferred tax methods, procedures for accounting changes and corrections, and the reasoning for setting up the corporation as a subsidiary will be addressed in the following memo.
Deferred Tax Method
Financial reporting and tax reporting create temporary differences between the amounts reported for income taxes and on the financial statements because an accrual basis is used for financial reporting and a modified cash basis is used for tax reporting. Deferred taxes reported contain a temporary difference between the tax basis of a liability or asset and its reported amount in the financial statements that will result in taxable or deductible amounts reporting years. Deferred tax liabilities and assets are recognized on the balance sheet based on the difference between the financial statement values and the tax basis (Kieso, Weygandt, & Warfield, 2007). The balance sheet approach and the guidelines of the Financial Accounting Standards (FAS No. 109) have been followed to account for this timing issue. Deferred tax assets are recorded when there are greater expenses for financial reporting than tax reporting. At some point the tax amount paid to the Internal Revenue Service (IRS) will be higher than the tax on the financial statements. Deferred tax liabilities occur when items are treated as expenses for tax purposes and capital expenditures on the financial statement. Alternatively deferred tax assets arise if losses are carried forward and offset against future taxes.
Operating losses can have a big impact on financial and tax reporting. The IRS losses are to be carried backward and forwards to offset reported taxable income.…...