Deferred Tax Liability Explained. CPA Exam

preview_player
Показать описание
In this video, I explain deferred tax liability.

Deferred tax liability is a tax payment that a company has put off (deferred) to a future period. It occurs when a company has earned a taxable amount but hasn’t yet paid taxes on it. This can happen due to differences in accounting practices for financial reporting and tax purposes. Here's an example to illustrate:

Example: Depreciation Differences

Suppose a company buys a piece of equipment for $100,000. For financial reporting purposes (on its financial statements), it uses straight-line depreciation over 10 years, meaning it claims a $10,000 depreciation expense each year. However, for tax purposes, the company uses an accelerated depreciation method, which allows it to claim a higher depreciation expense in the early years.

Let’s say that in the first year, the tax depreciation is $20,000. This means the company's taxable income is reduced more for tax purposes than for accounting purposes. So, if the company's pre-tax accounting income is $50,000, it will report a tax expense of $10,000 on its financial statements (assuming a 20% tax rate) but will only actually pay $6,000 in taxes (20% of the $30,000 taxable income after $20,000 depreciation).

In this scenario, the company has a deferred tax liability. It has reported a higher tax expense ($10,000) than it has paid ($6,000), leading to a $4,000 deferred tax liability. This liability represents taxes that the company will need to pay in the future when the tax depreciation is less than the financial reporting depreciation, and the taxable income is higher as a result.

#cpaexam #cpaexaminindia #professorfarhat
Рекомендации по теме
Комментарии
Автор

one question why you learn everything?

mohammadali-hkjz
Автор

I don't mean to be dramatic, but I love you for what you do. Thank you!

icecreamheadache