I've got this question on interviews before and still do not know how to answer it. Would you need to use deferred tax?
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Let’s assume a $100 increase:
IS: Pre-tax income down $100 due to added expense, NI down $80 @ a 20% tax rate
CF: Start with -$80 NI but add back $100 because SBC is a non-cash expense. Net cash is now up $20
BS: A: Cash up $20 | L/E: Retained earnings down $80 and Common Stock up $100 so net change up $20
Wouldn’t we need to factor in deferred taxes at all?
Yes, it does. I believe the IRS doesn't recognize non-cash based SBC so the cash taxes you pay will be higher than that implied by your provision for income taxes, creating a DTA.
This is correct – no idea why someone threw shit
IS: SBC is an expense that reduces PT income by 100. 40% tax rate leaves you with -60 NI.
CFS: -60 NI, but then need to add back the SBC because it’s non cash (the full 100). Ending change of cash is 40.
BS: Cash up by 40, so assets up by 40. SBC up by 100 so liabilities up by 100, since SBC is technically a wage expense/accrued expense. Retained earnings down by 60 because of the net income. Everything balanced
Okay that helps a lot thank you
Just like non cash expenses, only that likely DTA goes up rather than cash since SBC is not tax deductible when first booked.
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