As a general rule, anything prepaid is counted for taxes the exact same way they are on the books for an accrued method. i.e. if you prepaid something, it's an asset until the actual expense is incurred, at which point it is expensed. Works the same way for taxes. The expense is counted when the expense is incurred, not when the cash is paid.
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Also just thought of this, are prepaids, even though considered assets, treated the same as other assets in determining Operation cashflow using the indirect method? i.e. are we going to deduct the increase in the account, and add the decrease?
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Yes. ALL current assets are treated the same for the operating section adjustment. (Assuming indirect method.)
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Because, if these are being paid as deferred expenses, shouldn't they effectively be treated as liability accounts as the cash effect is not yet determined in the net income, and we should deduct a decrease, and add an increase in the account? (i'm thinking of it kind of like the accounts payable but backwards)
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They aren't liabilities and you can't think of them that way. Liabilities go the same direction as the change in the balance, i.e. add an increase in balance, and subtract a decrease in balance. Since that's "thinking like accounts payable," then assets
are backwards from that.
The fact that the cash hasn't been accounted for in the net income is exactly the point. You're adjusting an accrued net income to cash. Since the expense hasn't been charged, the prepaids aren't reflected in the net income. But the cash has been paid. Therefore that needs subtracted out in order to reduce it to where the cash actually is. (Or vice versa if the prepaid is a reduction.)
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