[harris016]

Can anybody help me understand why paying more depreciation for income tax purposes results in a deferred liability for the company. It seems to me like the company is paying the taxes early, before the expense is recognized on their books, and would therefor end up being an asset as they are paying before recognizing it on their books. Thanks in advance

[liz18lsu]

You don't “pay more” for depreciation. It is an expense and a timing difference between book and tax. The liability (more income because of the “flip” when the depreciation for book and tax falls out in future years) is deferred, to a future period, because of this timing difference.

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[liz18lsu]

You don't “pay more” for depreciation. It is an expense and a timing difference between book and tax. The liability (more income because of the “flip” when the depreciation for book and tax falls out in future years) is deferred, to a future period, because of this timing difference.

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[liz18lsu]

The tax depreciation is recorded on the company's income tax returns and will be based on the Internal Revenue Service's rules. The IRS might specify that the machine is a 7-year machine regardless of a company's situation. The IRS rules also allow a company to accelerate the depreciation expense. Accelerated depreciation means taking more depreciation in the first few years and less depreciation in the later years of the machine's life. This saves income tax payments in the first few years of the asset's life but will result in more taxes in the later years. Companies that are profitable will find the accelerated depreciation to be attractive.

The “result in more taxes in later years” is your deferred liability.

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[liz18lsu]

The tax depreciation is recorded on the company's income tax returns and will be based on the Internal Revenue Service's rules. The IRS might specify that the machine is a 7-year machine regardless of a company's situation. The IRS rules also allow a company to accelerate the depreciation expense. Accelerated depreciation means taking more depreciation in the first few years and less depreciation in the later years of the machine's life. This saves income tax payments in the first few years of the asset's life but will result in more taxes in the later years. Companies that are profitable will find the accelerated depreciation to be attractive.

The “result in more taxes in later years” is your deferred liability.

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[harris016]

So you could say it is “lowering” your taxable income earlier only for tax purposes…which will result in higher taxable income later …which means more future tax and hence the liability?

[harris016]

So you could say it is “lowering” your taxable income earlier only for tax purposes…which will result in higher taxable income later …which means more future tax and hence the liability?

[liz18lsu]

You got it!!!

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[liz18lsu]

You got it!!!

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[harris016]

Awesome…the deferred tax liabilities and assets take some thinking out…thanks for your help

[harris016]

Awesome…the deferred tax liabilities and assets take some thinking out…thanks for your help

[liz18lsu]

Haha, you are welcome! I realized when responding that I have done income tax provisions in industry for almost 10 years (timing diffs, M-1's, etc.) but when it came to typing an actual explanation, I felt completely incompetent putting the timing difference into words! I'm glad you got it. Makes so much more sense in practice!

DTA's and DTL's are purely future payment or lowering of tax because of the difference between book and tax. This is why Meals and Entertainment is a Permanent difference, and does not create a deferred. It is always different by 50%, where as for depreciation, an asset will eventually have the same amount of depreciation for both book and tax, just at a different date – thus a deferral.

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[liz18lsu]

Haha, you are welcome! I realized when responding that I have done income tax provisions in industry for almost 10 years (timing diffs, M-1's, etc.) but when it came to typing an actual explanation, I felt completely incompetent putting the timing difference into words! I'm glad you got it. Makes so much more sense in practice!

DTA's and DTL's are purely future payment or lowering of tax because of the difference between book and tax. This is why Meals and Entertainment is a Permanent difference, and does not create a deferred. It is always different by 50%, where as for depreciation, an asset will eventually have the same amount of depreciation for both book and tax, just at a different date – thus a deferral.

AUD - 88
REG - 86
BEC - 74, 1/2015
FAR - 2/2015

[harris016]

As I am going through Becker one of the problems is confusing me.

There are permanent and temporary differences which I understand.

Is there a general rule for why things are added or subtracted from the taxable income total.

Becker is showing non taxable bond interest received as being a subtract from taxable income, and is also showing a long term loss accrual in excess of deductible amount as being added to taxable income.

I am not understanding the basis for adding or subtracting to and from the taxable income

[harris016]

As I am going through Becker one of the problems is confusing me.

There are permanent and temporary differences which I understand.

Is there a general rule for why things are added or subtracted from the taxable income total.

Becker is showing non taxable bond interest received as being a subtract from taxable income, and is also showing a long term loss accrual in excess of deductible amount as being added to taxable income.

I am not understanding the basis for adding or subtracting to and from the taxable income

[MrCPA511]

harris016: it really just depends on the actual item. In your post, you basically explained it yourself for those 2 items. Non taxable bond interest is non taxable, so it shouldn't count towards your taxable income (subtract). Long term loss accrual in excess of deductible amount is allowed for financial purposes, but not for tax purposes. So in this case, you add it back to your taxable income to increase the income back.

FAR - 86 7/2014
AUD - 95 10/2014
REG - 87 1/22/15
BEC - 84 7/2015

[Author]

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