Deferred Tax Liability/Asset

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Devendra (Querist)

10 May 2010 Can anybody explain me how Deferred Tax Liability/Asset arises? How is it calculated?

Thank You,
Regards,
Devendra

Rahul Gupta

Rahul Gupta (Expert)

10 May 2010 There may be difference how certain items of expenditure are treated for tax purposes and how a company actually treats them in its accounts.
For example, tax laws allow a 100% depreciation in the year of acquisition of certain assets. But a company may actually write off the depreciation over a larger number of years in its accounts.
In other words, the company may charge depreciation at lower rates than allowed under tax laws. Or it may use a different method of charging depreciation. Tax laws may allow a company to deduct certain expenses in full in a single year, but it may phase out the charge over a number of years.
In these cases, a company ends up postponing part of its tax liability on this year's profits to future years. This is because, in the current year, its profits for tax purposes would be lower than the profits computed for accounting purposes. Under such circumstances Deferred tax liability arises.
In exactly opposite circumstances where the tax is paid in excess but the expenditure is allowed subsequently, Deferred tax Asset results.

Also, you can the check the files section for various files on Deferred Taxes and liabilities.

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