Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities represent the future tax consequences of temporary differences between the book and tax bases of assets and liabilities.
Explanation
A deferred tax liability (DTL) arises when book income exceeds taxable income due to a temporary difference that will reverse in the future — such as accelerated tax depreciation creating a lower tax basis than book basis for equipment. A deferred tax asset (DTA) arises when taxable income exceeds book income or from tax credit carryforwards and net operating loss carryforwards.
Deferred taxes are measured at the enacted tax rate expected to apply when the temporary difference reverses. Changes in tax rates require remeasurement of existing deferred tax balances. All DTAs and DTLs are classified as noncurrent on the balance sheet, and a valuation allowance reduces DTAs when realization is not more likely than not.
Key Points
- •DTL: book basis > tax basis for assets (or book basis < tax basis for liabilities)
- •DTA: book basis < tax basis for assets, plus NOL and credit carryforwards
- •Measured at enacted tax rates expected to apply at reversal
- •All deferred taxes are classified as noncurrent
Exam Tip
Practice identifying whether a temporary difference creates a DTA or DTL. Remember: permanent differences (like municipal bond interest) never create deferred taxes.
Frequently Asked Questions
Related Topics
Income Taxes (ASC 740)
ASC 740 governs the accounting for income taxes, requiring recognition of deferred tax assets and liabilities for temporary differences between book and tax bases of assets and liabilities.
Balance Sheet (Statement of Financial Position)
The balance sheet reports an entity's assets, liabilities, and equity at a specific point in time, following the fundamental accounting equation: Assets = Liabilities + Equity.
Corporate Taxation
Corporate taxation covers the tax rules for C corporations, which are taxed as separate entities at a flat 21% federal rate under current law.
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