FSA -Income Tax

To understand the calculations for income tax expense in each of the three years (Year 1, Year 2, and Year 3), let’s break down the components provided in the table:

1. Expected federal income tax expense (benefit) at 34 percent:
   • Year 3: ($112,000)
   • Year 2: $768,000
   • Year 1: $685,000

This component represents the income tax expense (or benefit) that the company would expect to pay (or receive as a benefit) if it were to use the statutory federal income tax rate of 34 percent applied to its taxable income for each year.

1. Expenses not deductible for income tax purposes:
   • Year 3: $357,000
   • Year 2: $32,000
   • Year 1: $51,000

These are expenses incurred by the company that are not deductible for income tax purposes. In other words, these expenses are not subtracted from the company’s taxable income when calculating its income tax liability.

1. State income taxes, net of federal benefit:
   • Year 3: $132,000
   • Year 2: $22,000
   • Year 1: $100,000

State income taxes are the taxes the company owes to state authorities. The “net of federal benefit” suggests that these figures are adjusted for any federal income tax benefit related to state taxes.

1. Change in valuation allowance for deferred tax assets:
   • Year 3: ($150,000)
   • Year 2: ($766,000)
   • Year 1: ($754,000)

A valuation allowance for deferred tax assets is an adjustment to account for the likelihood that some portion of deferred tax assets (e.g., tax credits or deductible temporary differences) may not be realized in the future. A decrease in the valuation allowance indicates that the company believes it is more likely to realize these deferred tax assets.

Now, let’s calculate the income tax expense for each year based on the provided information:

Income Tax Expense = Expected federal income tax expense (benefit) at 34 percent – Expenses not deductible for income tax purposes + State income taxes, net of federal benefit + Change in valuation allowance for deferred tax assets

Let’s calculate for each year:

Year 3: Income Tax Expense = ($112,000) – $357,000 + $132,000 – $150,000 = $(-287,000)

Year 2: Income Tax Expense = $768,000 – $32,000 + $22,000 – $766,000 = $(-8,000)

Year 1: Income Tax Expense = $685,000 – $51,000 + $100,000 – $754,000 = $(-20,000)

The negative values indicate that the company received a tax benefit in these years, meaning it paid less in taxes or received refunds due to various deductions, state taxes, and changes in the valuation allowance for deferred tax assets.