Question: You are the new controller and the company treasurer, Ralph Marks, believes that as a result of pending legislation, the current 40% income tax rate will be decreased for 2017 to 35% and is uncertain which tax rate to apply in determining deferred taxes for 2016. Marks also is uncertain which differences should be included in that determination and has asked you for help.

Your accounting group has provided the following information. Two items are relevant to the decision. One is the $50,000 insurance premium the company pays annually for the CEO’s life insurance policy for which the company is the beneficiary. The second is that your company purchased a building on January 1, 2015 for $6,000,000. The building’s estimated useful life is 30 years from the date of purchase, with no salvage value. Depreciation is computed using the straight-line method for financial reporting purposes and the MACRS method for tax purposes. As a result, the building’s tax basis is $5,200,000 at December 31, 2016.

Write a memo to Ralph Marks that addresses the following:

Identifies the objectives of accounting for income taxes.
Differentiates temporary differences and permanent differences.
Explains which tax rate to use.
Calculates the deferred tax liability at December 31, 2016.  Edit