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1) Common book-tax differences relating to accounting for capital gains and losses include recognition of net capital losses and subsequent net capital loss carrybacks and carryovers. The recognition of net capital losses in the year incurred creates unfavorable book-to-tax difference, while the use of net capital loss carrybacks and carryovers create favorable book-to-tax differences in the years applied (Spilker, et al., 2021). Differences are often temporary, as the favorable book-to-tax differences from use of the net capital loss carrybacks and carryovers offset the unfavorable book-to-tax difference from recognizing a net capital loss. However, unused net capital loss carryovers expire five years after incurred (Spilker, et al., 2021), at which point, the remaining temporary unfavorable book-to-tax difference not offset by the expired net capital loss carryover becomes essentially permanent.
In the annualized income method, corporations determine their required estimated tax payments by using quarterly taxable incomes to project annual estimated taxable income and related tax liability (Spilker, et al., 2021). The first quarter taxable income is used for the first and second quarter, while those of the second and third quarter are used for the quarters following (Spilker, et al., 2021). For each quarter, the taxable income is multiplied by the respective annualization factor to determine the annual estimated taxable income and associated 21% tax liability (Spilker, et al., 2021). Corporations pay 25% of the updated estimated tax liability amount per quarter, so the corporation determines the required estimated tax payments for the quarter by deducting prior quarters’ payments from the newly-calculated cumulative payment required at the present quarter, based on the associated cumulative percentage of taxes to be paid (Spilker, et al., 2021).
This method not only provides a reasonable estimation technique for corporations that are unable to use the prior-tax year’s liability for estimating payments for their current year, but it also provides a safe and reliable means of estimating payment liabilities for the current year (Spilker, et al., 2021).
Reference List:
Spilker, B. C., Ayers, B. C., Lewis, T. K., Weaver, C. D., Barrick, J. A., Robinson, J. R., Worsham, R.G. (2021). McGraw-Hill’s taxation of individuals and business entities. New York, NY: McGraw Hill LLC.
Usually, all book-tax definition cannot be met with the definition of a temporary difference. Some of the differences can only be seen on the tax return or income statement and not on both. Non-deductible fines and tax-exempt interest are examples of some differences that will only affect the income statement. The dividend received deductions, and excess tax over the book benefit through the exercising of nonqualified stock options is an example of items that will only appear on the tax return. These book taxes are mostly referred to permanent book-tax differences by the accountants. These taxes could be favorable or unfavorable; the classification depends on its impact. An example of unfavorable book-tax income is the one that needs an add-back for computing the taxable income. Some of the common book-tax differences are non-deductible tax penalties and fines, political contributions; disallowed business-related meals, life insurance proceeds, entertainment expenses, disallowed premiums on officers' life insurance.
Describe the annualized income method for determining a corporation's required estimated tax payments. What advantages does this method have over other methods?
In the annualized income method, the corporations calculated their taxable income by the end of each quarter of the year and annualized the amount in order to get an estimated taxable income and tax liability for that year. This method is used to avoid the estimated payment penalties. This estimated annual liability is used to calculate the minimum required payment as per estimation for that quarter. The first-quarter method is used as a corporation in order to project their annual liability for the first and second quarter of that year. The taxable income at the end of the second quarter is used to calculate the taxable income of the third quarter. And the third one is used to estimate the taxable income of the fourth quarter.