Catherine Duffy: Okay, welcome back, so here are we to get started with step one of the

calculation for the current income tax expense. When we're doing tax accounting, we're essentially

looking for two different numbers. We're looking for the current tax expense for the year and

we're looking for the deferred tax expense for the year and both of those could be a

benefit, so if it ends up being a debit, it's going to be expense. If it's a credit, it's

a benefit through the income statement, so we're going to start with the first calculation,

being the calculation of the current tax. You could do the deferred tax first, but I'm

going to do the current tax expense calculation first.

I like to call this one usually step one. Okay, so step one is calculation of current

income tax expense. To calculate the current expense, so this is the tax that you actually

have to pay this year. We always start with our accounting income and adjust it, just

like we would on a tax return. Adjust it to the taxable income figure, which is the figure

that you're taxed, that you have to pay is based on. We'll start with that accounting

income for 2016 and that was 80,000, so that's our starting point. Then we're going to adjust

this just like you would on a tax return, you're going to adjust this for things that

are different between the accounting income and what the taxes are based on. There are

lots of things that are different in the tax act between accounting and tax and given the

facts that I gave you originally related to this situation, we've got a few different

things and we usually classify those in this rough calculation here, splitting it between

the permanent and the differences that are not permanent, or time indifferences.

Let's start with the permanent differences. In the facts that I gave you, there were three

things that happen to be permanent differences, they will never be taxed the same way they

are recorded for accounting. One of them is the dividend income, so we have dividend income

that we received from Canadian corporations of 8,000 dollars, so that's included in that

accounting income figure. We don't have to pay tax on that. The tax laws say we don't

have to pay tax on that. I could get into a long explanation of why we don't have to,

but just the fact is the tax law says we don't have to pay tax on that 8,000 dollars because

it's already been taxed in the corporation that paid the dividend.

We subtract that from the accounting income to lower how much we're going to have to pay

tax for this year because we don't have to pay tax on the 8,000 anymore. Another item

that is considered a permanent difference is fines that we expensed, so we paid some

pines and we expensed them in this 80,000 dollars this year, they were for 3,000 dollars

and the tax law says that you are not allowed to expense for taxes anyways. You can't deduct

those 3,000 dollars worth of fines. You're allowed to as legitimate business expense

because you did pay it, you're allowed to expense it for business, so it's okay that's

it's subtracted in the accounting income, but it's not okay for calculating your taxes

owning, so you add it back.

The other one in the example that I gave you was meals and entertainment expense, so M

and E for short. The tax law currently says that 50% of your meals and entertainment expense

are not allowed to be deducted for tax purposes. We had meals and entertainment expense of

7,000 dollars I believe, so 3,500 dollars is not allowed to be expensed for tax, so

we'll add that back into that accounting income. Those are our three permanent differences.

Now there are other differences though that are different between accounting and tax,

but only in this particular year, so it's saying that it's something that's in this

accounting income or not in this accounting income, but should be in the taxes figure

for calculating the taxes that are owing, so a couple of examples of those and we'll

call those timing differences or temporary differences.

One of those is related to depreciation. There is depreciation that has been expensed of

80,000 dollars in there. That is not a legitimate expense for tax purposes, however, for tax

purposes you're allowed to take capital cost allowance, or CCA. The CCA for this year for

2016 works out to 3,000 dollars and that can be subtracted for tax purposes, so let's just

take a look at these numbers here, so this particular one was from the accounting net

book value where we depreciated 2,000 dollars per year. Whereas this was related to the

undepreciated capital cost allowance that ended the year last year, 2,500 dollars and

I think it had a tax class rate of 12%, so 2,500 dollars times 12% that was the amount

that was allowed deducted for tax purposes. Those two things will not be the same this

year, but eventually that whole asset that was purchased, the whole property, plant,

and equipment asset, eventually for accounting it will all have been expensed down to a net

book value of zero and eventually for tax, in theory anyways. It will eventually all

get deducted as CCA over many years to the point where it gets down to a class value

of zero.

Eventually they both do get fully expensed, both for accounting and for tax, but in any

given year, there can be differences. In this year, you can see that there is a difference

of a 1,000 dollars, where you can have more deduction for tax than you can for accounting

of an additional 1,000 dollars. Another timing difference was the warranty. This year we

actually spent 8,500 dollars repairing some products that we had sold in prior years and

we had accrued as a warranty liability. The entry when we did this, when we paid for these

repairs to these products would have been a debit to the warranty liability and a credit

to cash or accounts payable or whatever inventory that we had, so 8,500 dollars. You can see

neither, this entry didn't do anything to our income statement, so it had no effect

on our accounting net income. The entire warranty had been expensed in the prior years, but

this year when we actually spent some money, we just drew down the liability.

Well for tax purposes, you're only allowed to deduct this when you actually pay the warranty

and I almost had a little mistake here, can't forget the brackets. You are allowed to subtract

this or deduct the warranty when you actually pay it, so this is the actual amount spent,

so this can be deducted for tax purposes this year. Okay, so that's warranty.

Another item we had was our restructuring liability. This accrual that we made of 10,000

back because when we recorded this liability, we would have expensed it, so debit the expense,

credit the liability. That expense is therefore in that net income calculation, but the tax

laws say that you can't expense for tax purposes a liability that's just an accrual and hasn't

actually been incurred. We're going to add it back this year and then in the future years,

next year or whenever we do get around to restructuring the plant, then we'll deduct

what we actually spent, so it's very similar to this warranty situation, so we'll add back

this expense. We've expensed for accounting for now, but in future years we're going to

deduct it.

Then the last one that we had that was a timing difference was related to the rental income

that we had accrued, so we had accrued 6,000 dollars worth of rental income. The journal

entry when we accrued the rental income was a debit to some type of receivable, so it

could be rent receivable or something, I'll just say accounts receivable, for simplicity.

The entry we recorded in 2016 was a debit to the accounts receivable and a credit to

rental income, 6,000 dollars, so this rental income value is included in this net income

of 80,000 dollars, but we haven't yet received the money for it. The tax laws says that we

don't have to pay tax on this 6,000 dollars until we actually get the money from our customer,

even though for accounting we needed to accrue it, we don't have to pay the tax on it.

We're going to subtract it this year and then next year when we do collect this accounts

receivable, then we're going to have to add it back to include it in our income for tax

purposes. These are all the total permanent and timing differences, when you do this calculation,

technically you don't need to split it up between the permanent and the timing differences.

The two categories there, this is just rough work. The reason it's a good idea to split

things between permanent and timing differences because we're going to use these timing differences,

these are going to help give us a clue when we get onto the next stage, step two where

we do the deferred tax accounting calculation, these are going to give us a clue of the kinds

of things that we've got floating around that will affect our deferred taxes, so after you've

identified all of your permanent differences and timing differences, anything that is different

between accounting income and taxable income for this year, you're going to add them all

up. You get your taxable income for this fiscal year, and that taxable income will likely

be, and hopefully will be the same taxable income you get when you do get around to doing

your tax return.

Usually you're doing the accounting for taxes well before you get around to actually doing

the formal tax return, but our expectations are that this is what going to be what your

taxes payable for this year is based on, going to be based on this taxable income figure

of 73,000 dollars and you multiply that by the current year's tax rate, so whatever the

legislation says you have to pay tax on this year and we'll just make an assumption of

a simple 20% rate times a 73,000 dollars taxable income, this is your current tax expense.

It's not the whole tax expense for accounting purposes, it's just the current portion, so

you'll debit that tax expense of 14,600 and you'll credit a current income tax payable

liability that you have to pay to the government.

Okay, so that was the competition of the current tax calculation for 2016, we'll have another

video a little bit later that will summarize all of the journal entries for tax accounting,

but for now we're finished this calculation and whenever you're ready you can move on

to the step two calculations of deferred taxes.