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Deferred Income Tax

Deferred Income Tax
BusinessCorporate Finance and AccountingAccounting

What Is Deferred Income Tax?

A deferred income tax is a liability recorded on a balance sheet coming about because of a difference in income recognition between tax laws and the company's accounting methods. Hence, the company's payable income tax may not compare to the total tax expense reported.

The total tax expense for a specific fiscal year might be unique in relation to the tax liability owed to the Internal Revenue Service (IRS) as the company is deferring payment in light of accounting rule differences.

Understanding Deferred Income Tax

Generally accepted accounting principles (GAAP) guide financial accounting rehearses. GAAP accounting requires the calculation and disclosure of economic occasions in a specific way. Income tax expense, which is a financial accounting record, is calculated utilizing GAAP income.

A deferred income tax liability results from the difference between the income tax expense reported on the income statement and the income tax payable.

Interestingly, the IRS tax code indicates special rules on the treatment of occasions. The differences between IRS rules and GAAP rules bring about various calculations of net income, and accordingly, income taxes due on that income.

Situations might emerge where the income tax payable on a tax return is higher than the income tax expense on a financial statement. In time, assuming no other accommodating occasions occur, the deferred income tax account would net to $0.

Notwithstanding, without a deferred income tax liability account, a deferred income tax asset would be made. This account would address the future economic benefit expected to be received on the grounds that income taxes charged were in excess in view of GAAP income.

Instances of Deferred Income

The most common situation that produces a deferred income tax liability is from differences in depreciation methods. GAAP rules permit organizations to pick between numerous depreciation rehearses. In any case, the IRS requires the utilization of a depreciation method that is not the same as all the accessible GAAP methods.

Thus, the amount of depreciation recorded on a financial statement is generally not the same as the calculations found on a company's tax return. Over the life of an asset, the value of the depreciation in the two regions changes. Toward the finish of the life of the asset, no deferred tax liability exists, as the total depreciation between the two methods is equivalent.

Features

  • Deferred income tax can be classified as either a current or long-term liability.
  • Deferred income tax appears as a liability on the balance sheet.
  • The difference in depreciation methods utilized by the IRS and GAAP is the most common reason for deferred income tax.
  • Deferred income tax is a consequence of the difference in income recognition between tax laws (i.e., the IRS) and accounting methods (i.e., GAAP).