Tax One: Deferred Tax Liability

Ken Boyd, owner of St. Louis Test Preparation (www.stltest.net) presents part 1 of his course on Understanding Tax Accounting. Boyd points out that students can have success with Tax Accounting concepts by making connections to actual examples from business. As a former CPA, College Accounting professor, Auditor and Tax Preparer, Ken has a wealth of experience to bring to the subject.

Category:

Education

Tags:

• Deferred Tax Liability
• temporary differences
• depreciation for tax
• tax vs. book income
• deferred tax asset

[dropit66]

The concept is correct, however due to the increasing tax rates, I believe there's an additional

$3240 in additional tax expense due to paying higher taxes in later years.

The journal entries would include an additional $3240 Income Tax Exp in year 3 to make the numbers work.

[Moneyshotdrama7]

Excellent but I think the tax rate on year two is wrong.

[Moneyshotdrama7]

@stihlers16 Because the companies continue buying assets which continue to increase deferred liabilities. It can go on indefinitely.

[christyfengli]

Amazing!!!!!!!! I loved it, exceptional examples. I was so confused by the deferred tax when I was reading the books by myself, this really saved me!!!

[Link761]

Not sure if I'm correct but I don't believe his taxable income on the first set of numbers is correct. For example, in 2009 his pre-tax accounting income is $60,000 which implicitly includes the SL depreciation expense of $30,000, his Tax depreciation is $39,600 or a $9,600 increase in expenses.

Shouldn't the taxable income be $50,400 (the 60K pretax inc - 9600 more of an expense). I believe he is double counting $30K worth of depreciation. Any thoughts?

[thatoneguyBRIAN]

@bowlerkid If I understand what you're asking, in Ken's example the depreciation listed on the income statement is listed as "Book" (the straight line depreciation) and the depreciation listed on the tax books is labeled as "Tax" (the accelerated depreciation). He found the difference between the two and that is listed under "Temporary Difference." The definition from your book refers to the temporary differences in tax payable which is drawn out in the third chart.

[stihlers16]

If the deferred tax liability eventually even out, then why has almost every Fortune 500 company consistently increased its deferred tax liability YOY like clockwork? It might eventually even out on Candy Mountain, but in real life, not so much.

XOM's deferred tax liability now stands at $35B. You think that will ever "even out?"

[bowlerkid]

In my book, it says it is the difference between the depreciation on the income statement and the depreciation on the taxes that you subtract from pretax accouning income - to get the tax payable.

In your example though, there is only depreciation for tax - can you help me understand the reasoning for the difference?

[bowlerkid]

@bowlerkid btw, the background noise didn't bother me at least.

[bowlerkid]

OMG THANK YOU for that!

THAT WAS EXCEPTIONALLY HELPFUL!

It really helped to see the big picture in excel i.e. the whole process! I was clumping too many aspects of it at once and it became hard to separate but seeing that, it has helped a LOT!