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What Is Deferred Income Tax?

Deferred taxes are those that are payable later, usually in the case of a business.
Deferred income taxes can be classified as either liabilties or assets.
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  • Written By: Charity Delich
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 August 2014
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Deferred income tax results when temporary differences exist between the total income recorded on a company’s balance sheet and the amount of income that the company must pay taxes on for a particular time period. Including these taxes on accounting statements can help companies account for future taxes that they may owe to government revenue agencies.

Deferred income taxes can be classified as either liabilities or assets. An accounting department may manage deferred tax liabilities and assets in a way that helps maximize a company’s income for accounting purposes. Additionally, an accountant may seek to minimize the company's income for purposes of tax liability in a given fiscal tax year.

Companies document deferred tax liabilities and assets for several reasons. One key reason is to ensure that investors and company officers and directors are educated about future tax implications for the company. In addition, this documentation permits companies to easily report on their deferred income tax liabilities and assets.

A deferred income tax liability account estimates the amount of future taxes that will be assessed on income that has been recognized on a company’s accounting statement but that has not yet been recognized for income tax purposes. In this situation, the income earned on an accounting statement is greater than the company’s taxable income for a fiscal tax year. As a result, the company’s tax expenses usually exceed its taxes payable.

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For example, a company may owe $1,000,000 US Dollars (USD) in taxes on income earned. Due to tax regulations, however, the company may only be required to pay $900,000 USD in taxes for the fiscal tax year. The remaining $100,000 USD of income is generally categorized on the company’s books as a deferred income tax liability. Taxes are then paid at a later date.

A deferred tax asset may be listed on a company's balance sheet in order to document a situation where the company will likely realize a reduction in future income taxes due to an asset. In order to benefit from a deferred tax asset, a company first deducts the expense on its accounting books. Tax breaks are then provided at a later date.

A company may, for instance, have a deferred tax asset of $10,000 USD listed on its books. If the company earns $50,000 USD in income prior to taxes, the company can deduct the $10,000 USD deferred tax asset from the total taxable income. As a result, the company is only required to pay taxes on the $40,000 USD.

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DentalFloss
Post 1

I find this a bit confusing, but I suppose it explains why some companies seem to be worth so much, yet pay way less than you would expect on their taxes. It might also apply to very wealthy individuals, too, if they are involved in some sort of business.

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