Tax base of a liability

[Submariner]

Donations: ES company made donations of $100,000 in the current fiscal year. The donations were expensed for financial reporting purposes, but are not tax deductable based on applicable tax legislation.
The book states that the carrying amount is $0 (which makes sense, as the book states that donations were expensed for financal reporting purposes) but it then goes on to state that: “tax legislation does not allow donations to be deducted for tax purposes, so the tax base of the donations equals thecarrying amount.” I don’t understand why this is.

 

[S2000magician]

The tax base of an asset is the amount that will become an expense (or a detrement) in the future, usually through depreciation.
The tax base of a liability is the amount that will become a revenue (or a benefit) in the future.
Suppose that you donated $100,000, but that tax rules limit your annual deduction to $20,000. Then the first year you deduct $20,000 on your tax return, and your tax base is $80,000: four more years of deductions (benefits).
Here, you’re not allowed to deduct the $100,000 at all, so your future benefit is zero, so your tax base is zero. That’s what they were trying to say. (The fact that it equals the carrying amount is coincidental; they made it sound as if it were consequential.)

 

[Submariner]

That makes so much more sense now. Thank you.

 

[S2000magician]

You’re welcome.
Occasionally I make sense. Not often, though.

 

[Submariner]

Thank you.
I have another question (taxes are proving to be more tricky than I remembered) on the same topic:
Interest received in advance: ES receive in advance interest of $300,000. The interest is taxed because tax authorities recognize the interest to accrue to the company (part of taxable income) on the date of receipt.
I’ll be honest, I’m fairly lost with this one. The interest received in advance is a liability, and is expensed today. The book says the tax base is zero; i’m guessing this is because the $300,000 is expensed today and therefore will not be available for deductions in the future?
the book states that “the tax base of a liability is the carrying amount of the liablity - any amounts that will not be taxable”, so, we could state that: 0 = CA - 300,000 = CA=300000? Because the entire amount is taxed today? Because it is taxed today, it doesn’t have the opportunity to become revenue in the future?
Does that make any sense?

 

[S2000magician]

Submariner wrote:Thank you.

You’re welcome.

Submariner wrote:I have another question (taxes are proving to be more tricky than I remembered) on the same topic:
Interest received in advance: ES receive in advance interest of $300,000. The interest is taxed because tax authorities recognize the interest to accrue to the company (part of taxable income) on the date of receipt.

So far, so good.

Submariner wrote: I’ll be honest, I’m fairly lost with this one. The interest received in advance is a liability, and is expensed today.

No wonder you’re lost: interest received isn’t an expense; it’s a revenue.
Deferred expenses create assets (e.g., prepaid rent, insurance); deferred revenues (e.g., customer deposits) create liabilities.
This is a deferred revenue – interest received but not yet earned – so it creates a liability.

Submariner wrote:The book says the tax base is zero; i’m guessing this is because the $300,000 is expensed today and therefore will not be available for deductions in the future?

Remember what I wrote above: the tax base is the amount left for future effects on your taxes. Here, the entire amount has already been taxed, so there are no future tax effects: the tax base is zero.
Again, it’s a revenue, not an expense. It isn’t that it won’t be available for a deduction in the future (it’s not a deduction); it’s that it won’t be a taxable revenue in the future.

Submariner wrote:the book states that “the tax base of a liability is the carrying amount of the liablity - any amounts that will not be taxable”, so, we could state that: 0 = CA - 300,000 = CA=300000? Because the entire amount is taxed today? Because it is taxed today, it doesn’t have the opportunity to become revenue in the future?
Does that make any sense?

Yes. The carrying amount is 300,000, and 300,000 won’t be taxable in the future (because it’s already been taxed), so you have 300,000 − 300,000 = 0.
The formula works, but it’s a silly way to look at it. The smart way to look at it is that the amount that will be taxable in the future is zero, so the tax base is zero.