obsessed with taxes?

OK, yes, as an American living in Canada I am obsessed with my personal taxes right now.  Not to mention my US taxes are due tomorrow but my Canadian taxes are due by April 30th but I have to file in Canada before I file in the US because they get the majority of the taxes so I’ve filed the extension with the IRS so I can procrastinate on figuring out the Canadian tax and blah, blah, blah.  Phew!  But it got me thinking:

have you documented how your company accounts for corporate income taxes?

Yup, I’m having crazy thoughts (more like severe procrastination) right now but it is a genuine question.  Your auditors (if they are ‘big four’) are going to require you to document how you accounted for income tax in your financial statements.  Why?  Although most of you do your taxes after you have closed the year end books you need to account for whatever tax liability, or asset, during the year for which the taxes are based on and preceding years if necessary (a basic premise of the “matching principle”).

but I’m a start up - I’ve got loads of “loss carryforwards” - why do I need this?

Well, your loss carryforwards actually have value as well, as you have most likely disclosed in your note disclosures under “income taxes”, and the losses can be applied to reduce future years’ taxable income.  Also, under your notes regarding significant accounting policies you will most likely have one that addresses future income taxes.  Your auditors will want to see a policy that supports this note.

egad!  what does an Income Tax policy look like?

Fortunately, we at Business Ready have pulled together an Income Tax Policy so that you will have something to support your policy note disclosure that will probably look something like this:

Income taxes are calculated under the liability method. Temporary differences arising from the difference between the tax basis of an asset or liability and its carrying amount on the consolidated balance sheets are used to calculate future income tax liabilities or assets. Future income tax liabilities or assets are calculated using tax rates anticipated to apply in the periods that the temporary differences are expected to reverse. A valuation allowance is provided to the extent it is more likely than not that future income tax assets will not be realized.

If you don’t like this note disclosure example, check out publicly traded companies that are similar to you - they’ll all have a note that covers the income tax treatment.

Sigh, why do tax discussions never involve standard english?  Ever.  Geesh.  As a reminder, Business Ready is a huge supporter of using qualified tax accountants because the potential to screw up is just far too huge and the consequences are costly.

Back to my personal taxes.  Wish me luck.

If you’re really keen to procrastinate then brush up on the FASB: Income Tax Project that was updated late in 2008.  I’d give you the Canadian GAAP too but most of you should be thinking about IFRS by now so best to jump to IAS 12: Income Tax directly where the IASB has just recently published a draft for changes to IAS 12.