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Laxmi (Student) (74 Points)

04 May 2011

What is deferred tax? Plz explain with some exaples?

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Devendra (Chartered Accountant) (4775 Points)
Replied 04 May 2011

Please find attached herewith the file. It might help you understand the concept of Deferred Tax.

Regards,

Devendra K

Attached File : 30 as 22 on deferred taxation.ppt downloaded: 222 times

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Ashish Jain (.Net Developer) (641 Points)
Replied 04 May 2011

Deferred tax assets represent taxes that have been paid (or often the carryforward of losses) but which have not yet flowed through the income statement. A deferred tax liability represents tax payments that have appeared on the income statement but not yet been paid. They usually arise when accounting standards and tax authorities recognize the timing of taxes due at different times. For example, when a company uses accelerated depreciation when reporting to the tax authority (to increase expense and lower tax payments in the early years) but uses the straight-line method on the financial statements. Since these differences will correct over the course of the assetâ€™s depreciable life, they are called â€œtemporary differences.

Ashish Jain (.Net Developer) (641 Points)
Replied 04 May 2011

Deferred tax represents a company's liability for taxes owed that is postponed to future periods. Deferred tax is primarily the result of tax law that allows firms to write off expenses faster than they are recognized and thus create a deferred tax liability. For example, under tax law companies can often depreciate fixed assets at a faster rate for tax purposes than the actual use of the asset would dictate. Theoretically, the resulting difference between income under Generally Accepted Accounting Principles and income for tax purposes sets up a deferred tax liability for the apparent taxes owed to the IRS in the future. In actual practice, the deferred tax liability may be postponed indefinitely if the company continues to buy new equipment. Over the past decades, accounting standards for deferred tax have been revised substantially. The rules for deferred tax remain complex and, in some circles, controversial. Some observers argue that deferred tax is merely an accounting fiction and that no deferred tax should be recognized, because the only tax liability is the amount actually owed to the IRS.