Accountancy, asked by sudhaneelakandanacs, 7 months ago

i need to know about defferred tax treatments with liberal explanation with respect to its basics

Answers

Answered by INNOCENTDEVIL006

What Is Deferred Tax Liability?

Deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid. The deferral comes from the difference in timing between when the tax is accrued and when the tax is paid. A deferred tax liability records the fact the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivab

How Deferred Tax Liability Works

Because U.S. tax laws and accounting rules differ, a company's earnings before taxes on the income statement can be greater than its taxable income on a tax return, giving rise to deferred tax liability on the company's balance sheet. The deferred tax liability represents a future tax payment a company is expected to make to appropriate tax authorities in the future, and it is calculated as the company's anticipated tax rate times the difference between its taxable income and accounting earnings before taxes.

Simplifying Deferred Tax Liability

A simple way to define the deferred tax liability is the amount of taxes a company has "underpaid"—which will (eventually) be made up in the future. By saying it has underpaid doesn't necessarily mean that it hasn't fulfilled its tax obligations, rather it is recognizing that the obligation is paid on a different timetable.

For example, a company that earned net income for the year knows it will have to pay corporate income taxes. Because the tax liability applies to the current year, it must also reflect an expense for the same period. But the tax will not actually be paid until the next calendar year. In order to rectify the accrual/cash timing difference is to record the tax as a deferred tax liability.

Examples of Deferred Tax Liability Sources

A common source of deferred tax liability is the difference in depreciation expense treatment by tax laws and accounting rules. The depreciation expense for long-lived assets for financial statements purposes is typically calculated using a straight-line method, while tax regulations allow companies to use an accelerated depreciation method. Since the straight-line method produces lower depreciation when compared to that of the under accelerated method, a company's accounting income is temporarily higher than its taxable income.

The company recognizes the deferred tax liability on the differential between its accounting earnings before taxes and taxable income. As the company continues depreciating its assets, the difference between straight-line depreciation and accelerated depreciation narrows, and the amount of deferred tax liability is gradually removed through a series of offsetting accounting entries.

Another common source of deferred tax liability is an installment sale, which is the revenue recognized when a company sells its products on credit to be paid off in equal amounts in the future. Under accounting rules, the company is allowed to recognize full income from the installment sale of general merchandise, while tax laws require companies to recognize the income when installment payments are made. This creates a temporary positive difference between the company's accounting earnings and taxable income, as well as a deferred tax liability.

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Answered by sahiljawale2006

Explanation:

What Is a Deferred Tax Asset?

Items on a company's balance sheet that may be used to reduce taxable income in the future are called deferred tax assets. The situation can happen when a business overpaid taxes or paid taxes in advance on its balance sheet. These taxes are eventually returned to the business in the form of tax relief. Therefore, overpayment is considered an asset to the company. A deferred tax asset is the opposite of a deferred tax liability, which can increase the amount of income tax owed by a company.

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Deferred Tax Asset

Understanding Deferred Tax Assets

Deferred tax assets are often created due to taxes paid or carried forward but not yet recognized on the income statement. For example, deferred tax assets can be created due to the tax authorities recognizing revenue or expenses at different times than that of an accounting standard. This asset helps in reducing the company’s future tax liability. It is important to note that a deferred tax asset is recognized only when the difference between the loss-value or depreciation of the asset is expected to offset future profit.1

KEY TAKEAWAYS

A deferred tax asset is an item on the balance sheet that results from overpayment or advance payment of taxes.

It is the opposite of a deferred tax liability, which represents income taxes owed.

A deferred tax asset can arise when there are differences in tax rules and accounting rules or when there is a carryover of tax losses.

Beginning in 2018, most companies can carryover a deferred tax asset indefinitely.

A deferred tax asset can conceptually be compared to rent paid in advance or refundable insurance premiums; while the business no longer has cash on hand, it does have comparable value, and this must be reflected in its financial statements.

How Deferred Tax Assets Arise

The simplest example of a deferred tax asset is the carryover of losses. If a business incurs a loss in a financial year, it usually is entitled to use that loss in order to lower its taxable income in the following years.2 In that sense, the loss is an asset.

Another scenario where deferred tax assets arise is when there is a difference between accounting rules and tax rules. For example, deferred taxes exist when expenses are recognized in the income statement before they are required to be recognized by the tax authorities or when revenue is subject to taxes before it is taxable in the income statement.1 Essentially, whenever the tax base or tax rules for assets and/or liabilities are different, there is an opportunity for the creation of a deferred tax asset.

Practical Example of Deferred Tax Asset Calculation

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A computer manufacturing company estimates, based on previous experience, that the probability a computer may be sent back for warranty repairs in the next year is 2% of the total production. If the company's total revenue in year one is $3,000 and the warranty expense in its books is $60 (2% x $3,000), then the company's taxable income is $2,940. However, most tax authorities do not allow companies to deduct expenses based on expected warranties; thus the company is required to pay taxes on the full $3,000.

If the tax rate for the company is 30%, the difference of $18 ($60 x 30%) between the taxes payable in the income statement and the actual taxes paid to the tax authorities is a deferred tax asset.

Important Considerations for Deferred Tax Assets

There are some key characteristics of deferred tax assets to consider. First, starting in the 2018 tax year, they can be carried forward indefinitely for most companies, but are no longer able to be carried back.3

The second thing to consider is how tax rates affect the value of deferred tax assets. If the tax rate goes up, it works to the company’s favor because the assets’ values also go up, therefore providing a bigger cushion for a larger income. But if the tax rate drops, the tax asset value also declines. This means that the company may not be able to use the whole benefit before the expiration date.

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