Tax provisions are like a terrarium. Every year we take a fresh glass bowl, pour in just that year’s pretax GAAP income from continuing operations and enacted tax law, then set a cork in the bottle and that year’s pre-tax GAAP income will continue to wind off its deferred tax assets and liabilities over the coming years. Much like hydrogen, oxygen, and carbon will shift from water to gas within the terrarium as needed, so will the current and deferred tax expenses change and shift each year until the end of time.
At least, that’s how my mind thinks of it.
We have a small group of tax accounts to play with when doing a provision. These accounts ONLY deal with the provision. Nothing outside the tax process affects them (not that we don’t find sales tax and other miscellanea in our income tax accounts that need to be reclassed out). In general, high level, the accounts play according to these rules:
Taxes Payable/Receivable —————————————–> Current Tax Expense
Deferred Tax Assets/Liabilities, Valuation Allowance ——–> Deferred Tax Expense
That is to say, if you want to change the balance sheet accounts for taxes payable/receivable, this can only be done with current tax expense (and cleared out with actual cash payments). If you want to change the balance sheet accounts of DTA/DTL/VA, this can only be done with the deferred tax expense account.
Consider the following: You have an R&D credit generated from this year, and tax loss from a prior year. The provision is done, and booked, except for this carryback. You would think to carryback that claim the following entry would be made:
Tax Receivable 100
Deferred Tax Asset 100
This would correctly reduce the DTA, and put the expected refund up on the balance sheet. But what is really occurring is the following net zero tax expense entry:
Tax Receivable 100
Current tax expense 100
Deferred tax expense 100
Deferred Tax Asset 100
You can book your entries with the first or the second journal entry and still be correct on both your income statement and balance sheet. However, your footnote detailing current and deferred expense will be off if the first entry is used.
Tax Sophomore 