Tax Sophomore

Tax Balance Sheet

We know the GAAP financial statements. The income statement shows us what happened during the present year. The balance sheet shows us where we are NOW based on the PAST transactions that have occurred. 

Did you know, we have a set of tax financials that are very similar? 

Form 1120 page 1 (and all its cute little statements and supporting schedules) is the income statement. But don’t think for a moment that Sch L is tax balance sheet. That’s BOOK (it may be GAAP, but it can be something else like STAT or cash basis).  

So where is the tax balance sheet? 

It’s all in your mind, baby. That is, unless you are a tax planning god or goddess, then it actually exists somewhere (but good luck finding time in the budget to make one). But if we did have one, it would show us exactly for TAX what it does for GAAP, where we are NOW based on the PAST transactions. Seeing the TAX balance sheet in your mind is so, so, so very important to working through tough M-1 adjustments. 

Our balance sheets are our basis. Want to sell and asset for $100,000? I can calculate easily what the GAAP and TAX gain or loss will be because proceeds less basis is gain or loss.  

Think about a $1 million asset placed in service Jan 1 of present year with 5 year life and 100% bonus for tax. At the end of the year cost will be $1 million for both GAAP and TAX, but accumulated depreciation GAAP will be $200k (total basis $800k) and $1 mil (total basis $0) for tax.

Provision 

Now let’s take this financial statement concept to the provision. Current provision is just like your income statement showing the present period difference between pretax GAAP income (starting point) to the taxable income (ending point, then we NOL, times by rate, play with credits, blah, blah, present period current tax expense, tah dah!). 

The deferred provision is a balance sheet that shows us NOW what we will get in the FUTURE for tax. This is the inverse of the regular balance sheet that shows us what we have NOW based on the PAST (because we are taking TAX – GAAP balance sheet we are tax future focused). 

Deferred Tax Asset = tax deduction or reduction of taxable income in the future (TAX basis – GAAP basis). 

Divine Insight 

Still want to make that invisible tax balance sheet visible and become a tax goddess? Its GAAP balance sheet +related DTAs –related DTL. Take GAAP TB, add column to right for DTA(DTL), categorize each DTA/DTL to the related GAAP BS account, and add across. M&A planning just got SO much easier.