Deferred Tax Asset and Deferred Tax Liablity

These lectures cover CPA practice questions covering deferred tax asset, deferred tax liability, valuation allowance, future taxable amount, future deductible amount.

Overview of Deferred Income Taxes

Deferred Taxes--Applicable Tax Rates

Deferred and Current Income Tax Expense

Deferred Tax Asset and Liability

Deferred Taxes: Classification | NOL

Taxable vs. Deductible Temporary Differences

Deferred Taxes: Temporary vs. Permanent Differences

Pretax financial income is a financial reporting term. It also is often referred to as income before taxes, income for financial reporting purposes, or income for book purposes. Companies determine pretax financial income according to GAAP. They measure it with the objective of providing useful information to investors and creditors.

Taxable income (income for tax purposes) is a tax accounting term. It indicates the amount used to compute income taxes payable. Companies determine taxable income according to the Internal Revenue Code (the tax code). Income taxes provide money to support government operations.

The differences between income tax expense and income taxes payable in this example arise for a simple reason. For financial reporting, companies use the full accrual method to report revenues. For tax purposes, they use a modified cash basis.

temporary difference is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements, which will result in taxable amounts or deductible amounts in future years. Taxable amounts increase taxable income in future years. Deductible amounts decrease taxable income in future years.

Deferred Tax Liability

deferred tax liability is the deferred tax consequences attributable to taxable temporary differences. In other words, a deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year.

Deferred Tax Asset

deferred tax asset is the deferred tax consequence attributable to deductible temporary differences. In other words, a deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.

Deferred Tax Asset—Valuation Allowance

Companies recognize a deferred tax asset for all deductible temporary differences. However, a company should reduce a deferred tax asset by a valuation allowance if, based on available evidence, it is more likely than not that it will not realize some portion or all of the deferred tax asset. “More likely than not” means a level of likelihood of at least slightly more than 50 percent.

Income Statement Presentation

Circumstances dictate whether a company should add or subtract the change in deferred income taxes to or from income taxes payable in computing income tax expense. For example, a company adds an increase in a deferred tax liability to income taxes payable. On the other hand, it subtracts an increase in a deferred tax asset from income taxes payable.

Temporary Differences

Taxable temporary differences are temporary differences that will result in taxable amounts in future years when the related assets are recovered. Deductible temporary differences are temporary differences that will result in deductible amounts in future years, when the related book liabilities are settled.

Permanent Differences

Some differences between taxable income and pretax financial income are permanent. Permanent differences result from items that (1) enter into pretax financial income but never into taxable income, or (2) enter into taxable income but never into pretax financial income.