October 30, 2016 admin

Prepaid Expenses—Taxes—Income

Assets

PREPAID EXPENSES—TAXES—INCOME ASSET ACCOUNT
1540

ACCOUNT EXPLANATION
The income tax on expenses deducted for book purposes in the current or prior years but not deductible for income tax purposes until the following year. Also includes tax payable on income deferred on the books which is taxable in the current year.
TRANSACTIONS
  Jrnl. Dr. Cr.
  Income tax on expense items not deductible until the following year G
    Prepaid Taxes—Income 1540
      Income Taxes—Current Year 2205
             
  Transfer of portion of Account 1540 to be applied against the income tax liability in the current year G
    Income Taxes—Current Year 2205
      Prepaid Taxes—Income 1540
COMMENTS
  • This account provides a means of applying deferred income tax accounting principles when there are items expensed for book purposes but not deductible for income tax purposes until the following year. See Account 1835, Deferred Charges, Deposits & Other, for income tax on expenses deducted for book purposes in the current year but not deductible for tax purposes for two or more years.
  • Entries to this account arise when there are differences in treatment for book and tax purposes of expenses, such as: legal fees, audit fees, inventory service fees, bad debts, and contributions.
  • The above transactions assume that the current year income tax expense as recorded in Account 9900, Estimated Income Taxes, was calculated using book income, unadjusted for tax differences.
  • Tax counsel should be consulted regarding the use of deferred income tax accounting.