Corduroy Frog Posted November 18, 2021 Report Share Posted November 18, 2021 Assume a company follows the "equity method" for accounting for investments - i.e. adjusting the balance sheet investment account for profits and losses of companies for which they own 20% or more. Does this create a book-to-tax difference? Example: Company A owns 30% of Company Z. It's initial investment in Company Z is $100,000, and is carried on the balance sheet of company A as such. After one year, Company Z profits are $50,000. I am told the "equity method" requires Company A to increase it's investment account by $15,000 (30% of $50K), and report the $15,000 as "investment income" for P&L purposes. As far as I can tell, Company A's basis in Company Z is still only $100,000, and the $15,000 profit is recognized but not realized. My question: Is the $15,000 a book-to-tax difference? Quote Link to comment Share on other sites More sharing options...
Lee B Posted November 18, 2021 Report Share Posted November 18, 2021 "Tax Impact The dividends received under the cost method create taxable income. For example, if UVW Corp. pays out 2 percent a year in dividends, your income is 2 percent of $10 million, or $200,000. In the 24 percent tax bracket, you would incur a $48,000 tax liability. The equity method has a larger potential effect on income and thus on income taxes. Suppose XYZ Corp routinely earns a 10 percent annual return on equity. In the first year, you would record income of 10 percent of $10 million, or $1 million. Your tax liability is $240,000. Since income is normally more volatile than dividend yield, the equity method has more potential to affect your company’s tax bill." The way you phrase questions, I never know whether it's a real client question or a head scratching hypothetical question? Quote Link to comment Share on other sites More sharing options...
Corduroy Frog Posted November 19, 2021 Author Report Share Posted November 19, 2021 Thank you Mr. Lee - you did answer the question. And FWIW, there is usually a real client, but never with big round numbers that are used for a contrived example. Quote Link to comment Share on other sites More sharing options...
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