What Is Deferred Tax?

What Is Deferred Tax?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Deferred tax is a financial term used to describe a scenario where a business has a tax liability or asset that is due in the future. This often arises from a discrepancy between the time when the tax is recognized by accounting rules and when it is recognized by tax laws. Basically, it’s a tax that has been assessed or levied in the current period but has not been paid yet.

Related Questions

1. How is a deferred tax asset created?

A deferred tax asset is created when a business overpays taxes or pays them in advance. These payments can be applied towards future tax obligations.

2. What is a taxable temporary difference?

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Taxable temporary difference is when the tax base of an asset is greater than its carrying amount in the financial statements. It will result in taxable amounts in later periods when the carrying amount of the asset is recovered.

3. How does deferred tax affect profit and loss?

Deferred tax can influence profit and loss because it is a tax that the company will pay or recover in the future. If it is expected to be paid, it’s considered a liability and if expected to be recovered, it’s considered an asset.

4. How do you recognize deferred tax?

Deferred taxes are recognized using the balance sheet asset and liability method. This takes into account the estimated future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases.

5. Why is deferred tax not discounted?

Deferred tax isn’t discounted as international accounting standards dictate that the future tax consequences of current transactions and events are recognized at the tax rates expected to apply when the taxes are actually paid or recovered.