• Welcome to OGBoards 10.0, keep in mind that we will be making LOTS of changes to smooth out the experience here and make it as close as possible functionally to the old software, but feel free to drop suggestions or requests in the Tech Support subforum!

Hot Secretary, Get the President on the Phone. I Just Got Tired of Paying Taxes

ONW

ONW

Well-known member
Joined
Apr 19, 2011
Messages
19,177
Reaction score
658
http://www.msn.com/en-us/money/taxe...-no-taxes-in-2015/ss-AAgzvj8?ocid=mailsignout

"There are 27 companies in the Standard & Poor's 500, including telecom firm Level 3 Communications (LVLT), airline United Continental (UAL) and automaker General Motors (GM), that reported paying no income tax expense in 2015 despite reporting pre-tax profits, according to a USA TODAY analysis of data from S&P Global Market Intelligence.
 
Lets go to #2 shall we.

"Accounting rules allow the airline to offset taxes due with valuation allowances resulting from losses in past years. During 2015, these allowances amounted to $4.7 billion which erased the company's $1.5 billion tax bill based on its normal corporate tax rate. "

Valuation allowance is a financial accounting construct that requires a company to offset deferred tax assets (another financial accounting construct) when those deferred tax assets cannot be realized. It literally has absolutely nothing to do with how much a company will actually pay in taxes for any year.



 
Last edited:
I'm not an accountant. I posted an article without any comment outside of using a Kenny Powers quote for a laugh.

Can I apply the same constructed financial accounting practices as an individual? Honest question
 
short answer: overly complicated tax code written largely by lobbyists creates counterintuitive results that are difficult for ordinary americans to understand, and said americans feel that the deck is stacked against them as a result. the fact that said results are perfectly legal is not an answer to the problem, it's part of the problem.
 
ONW said:
I'm not an accountant. I posted an article without any comment outside of using a Kenny Powers quote for a laugh.

Can I apply the same constructed financial accounting practices as an individual? Honest question
Click to expand...

Deacon923 said:
short answer: overly complicated tax code written largely by lobbyists creates counterintuitive results that are difficult for ordinary americans to understand, and said americans feel that the deck is stacked against them as a result. the fact that said results are perfectly legal is not an answer to the problem, it's part of the problem.
Click to expand...

This instance has nothing to do with the tax code. This is solely a GAAP measure. Since individuals don't file financial statements with the SEC or other 3rd party user they generally don't care what their GAAP personal financial statements would be.

Is financial accounting and tax accounting for large corporations complicated? Yes. Alot of that has to do with GAAP which is highly theoretical and judgemental in its determination of matching income and expenses. Tax is mostly concerned with cash movements and paying tax on a cash flow basis.

Financial accounting for taxes involves a reconcilaition of those two bases of accounting against each other.
 
Boeing is a good example as they often appear on these lists.

For financial accounting, they use this method called program accounting where they determine what they think will be the average cost to build an airplane over the entire program and this is what they expense for financial reporting purposes. So, if a plane actually costs them $80 million to build in the early stages of a program but they think that over the life of the program that the average cost to build a plan will be $50 million, then for financial reporting purposes they expense $50 million and defer the costs on $30 million. This can add up to billions of dollars in deferred costs and inflate their earnings for financial reporting purposes.

The IRS is on a cash basis. If it costs you $80 million to make a plane right now, then this is the cost and you make a profit/loss on whatever you sold it for less the $80 million.

Because of that, you can get in a situation where you have book income and tax losses. I would argue from an economic standpoint that the tax situation is more reflective of the economic reality of what actually happened in the year.

Stock compensation is another example. For financial accounting, you determine the value of the award at the grant date and this is what is expensed for financial reporting purposes. So if the value of restricted stock was $1 when it was granted, that is all that will be expensed for financial reporting purposes regardless of any changes in value of the stock. If the value of that stock increases to $100 when it is actually vested and given to the employee, then that is the value for tax purposes. The company gave the employee something worth $100. The company deducts that $100 as compensation expense and the employee recognizes $100 in wages. That's another situation where financial reporting income will be significantly higher than tax income/loss, but the tax rules more closely match the economic reality of the transaction.
 
Last edited:
ChrisL68 said:
This instance has nothing to do with the tax code. This is solely a GAAP measure. Since individuals don't file financial statements with the SEC or other 3rd party user they generally don't care what their GAAP personal financial statements would be.

Is financial accounting and tax accounting for large corporations complicated? Yes. Alot of that has to do with GAAP which is highly theoretical and judgemental in its determination of matching income and expenses. Tax is mostly concerned with cash movements and paying tax on a cash flow basis.

Financial accounting for taxes involves a reconcilaition of those two bases of accounting against each other.
Click to expand...

I'm assuming you posted this as an example of 923's point.
 
PhDeac said:
I'm assuming you posted this as an example of 923's point.
Click to expand...

But it isn't the tax code that is often what complicates it.

Say you make a widget for $80 and you sell it for $100. It makes sense that you have $20 in cash, which is profit which you pay taxes on. This is tax accounting

It isn't very intuitive that you are actually going to have income of $50 based on the fact that you think that you will be able to make the widget cheaper in the future and therefore you are going to defer $30 of the cost of the widget you just made. This is financial accounting.
 
ChrisL68 said:
Stock compensation is another example. For financial accounting, you determine the value of the award at the grant date and this is what is expensed for financial reporting purposes. So if the value of restricted stock was $1 when it was granted, that is all that will be expensed for financial reporting purposes regardless of any changes in value of the stock. If the value of that stock increases to $100 when it is actually vested and given to the employee, then that is the value for tax purposes. The company gave the employee something worth $100. The company deducts that $100 as compensation expense and the employee recognizes $100 in wages. That's another situation where financial reporting income will be significantly higher than tax income/loss, but the tax rules more closely match the economic reality of the transaction.
Click to expand...

[TaxNerd]Unless employee makes an 83b election, right? Generally don't deal with this, but it's an interesting concept to me, especially in the start-up situation (where the value at the time of the grant is usually next to nothing, so there's almost no risk on the part of the employee).[/TaxNerd]
 
True if the employee makes an 83b election, then they pay wages on the amount at grant and the employer expenses that amount and any additional gains are capital in nature to the employee.

Didn't mention that since it isn't what creates these huge book tax differences that Sanders and ilk rave about.
 
ChrisL68 said:
But it isn't the tax code that is often what complicates it.

Say you make a widget for $80 and you sell it for $100. It makes sense that you have $20 in cash, which is profit which you pay taxes on. This is tax accounting

It isn't very intuitive that you are actually going to have income of $50 based on the fact that you think that you will be able to make the widget cheaper in the future and therefore you are going to defer $30 of the cost of the widget you just made. This is financial accounting.
Click to expand...

You're missing his point. The system is intentionally complex and outside the understanding of the average American. Arguing about why code or which type of tax or which forms just shows what he's talking about.
 
PhDeac said:
You're missing his point. The system is intentionally complex and outside the understanding of the average American. Arguing about why code or which type of tax or which forms just shows what he's talking about.
Click to expand...

Business is complex. Law is complex. I am sure the research you did to obtain your PhD couldn't be easily explained to the average layperson in a quick soundbite.

And I understand that this is an area that is easily exploited by demogogues like Trump and Sanders.
 
Everybody should be able to give an elevator speech on their PhD research.

If something is complex, why not simplify it? Business can be complex without a complex taxation process.
 
PhDeac said:
Everybody should be able to give an elevator speech on their PhD research.

If something is complex, why not simplify it? Business can be complex without a complex taxation process.
Click to expand...


And I gave you an elevator speech to explain the difference in the tax code and financial accounting. Most people just gloss over it because they have no interest in it.

Again, the taxation process often isn't what is complicated. It is reporting that amount within the realm of financial accounting rules, which are highly theoretical rules developed by academics and theorists that often don't make much economic sense.

But in certain instances, complexity is required because it is law based and if you simplify it there are a million ways to structure things around that simple law.
 
Last edited:
So then why rely on financial accounting?
 
I think ChrisL's point is that the typical articles and lists that purport to show no income tax expense despite having pre-tax profits are comparing apples and oranges. Actually, they may not even be comparing apples and oranges, it's more like oranges and baseballs. Tax accounting and financial accounting are very different things. Both are complex and we can debate the merits of that complexity, but the point is that you can't compare the numbers that come from both - they aren't comparable.
 
This thread serves as a reminder to me of why I bailed on accounting four years after graduating. It's a great foundation for other stuff, but I found the practice of it maddening.
 
  • Like
Reactions: ONW
You must log in or register to reply here.
Back
Top