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Can someone explain 704(b) in simple terms?
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It’s a temporary item - that’s the correct treatment, it’s not a perm. As others have said, it’s deductible for both federal tax purposes and book purposes, there can just be timing differences as to what’s recognized between the two in a given year. Typically because the deferred state expense piece is not deductible yet for tax purposes.
As for why it affects your rate - this has nothing to do with the fact it’s temporary and everything to do with the fact that you start at 21% corporate statutory rate. The reason why you add on the state tax rate isn’t because it’s a permanent item - it’s because you pay corporate state taxes too and it’s not reflected in your starting point. The same logic follows through with the benefit of paying these state corporate taxes - you get a deduction for federal purposes, which reduces the impact of the additional taxes.
TL;DR: The reason you have a reconciling item for (as an example):
Corporate tax rate 21%
State taxes (nofb) 3%
= 24%
Has nothing to do with the temporary or permanent nature of the items and everything to do with the fact that you do pay additional taxes to state and that’s not captured in your starting point of 21%.
As for how this affects the deferreds - it doesn’t have its own line item correct, but it’s embedded in how the deferreds are tax effected. They’re not tax effected at just 21% - they’re tax effected at both your federal and state rates (including NOFB). So that’s where it appears on your deferred roll but it’s absolutely there.
Subject Expert
Spot on.
Seen way too many people consider fbos in the fed rate, which while you get to the same answer, is incorrect.
Won’t the expense also be deducted on the books? So it’s timing (current expense is tax deduction whereas deferred state expense already was or will be deducted later)? I don’t see how you can say you have a deduction on the return that will never hit net income or impact retained earnings.
Yeah, unless it will never be deductible for tax for some reason...but since it’s a book expense, and a tax deduction...why would it be permanent?
Is the company on the lag method for their tax returns? Meaning, for tax return purposes they deduct the taxes the year the year after the income occurred (ie deduct your 18 state taxes on your 19 fed return)
Not sure, have you seen that companies that are in the lag method treat it as a temp and company that use the 19 estimate + PTR treat it as a perm?
Also the way I’ve seen it treated typically is the current portion is the same for book and tax, the deferred state taxes is disallowed in given year as a temporary item.
Not a huge corporate person here, but could it depend on the nature of the difference? Like if you’re paying more/less SALT now because of depreciation, it’s temporary bc it will eventually adjust? If it’s a non-conforming tax reform/CARES act item and you’re paying more/less tax, then it’s permanent?
Yikes, it was a total guess. Better wait for somebody who knows what they’re talking about!
It’s a temp item. Fed tax is perm.