You might have come across “Deferred Income Tax” on the balance sheet of any business. It could be a difficult concept for anyone lacking basic accounting and taxation knowledge. However, this article will try to explain the concept of deferred income tax in South Gate, CA. Read to know more about it.
What is Deferred Income Tax?
Deferred income tax arises due to the difference in accounting methods and the IRS rules. You need to understand the background to know further. Nearly all businesses perform accountancy according to some certain guidelines.
These guidelines are not issued by the government, but various non-profit organizations. For example, the International Accounting Standards Board (IASB).
In the US, most companies follow Generally Accepted Accounting Principles (GAAP).
The fact of the matter is that these guidelines are more flexible and allow a range of acceptable practices.
On the other hand, tax rules are set by the IRS. These rules are strict in nature and need to be followed to the dot. As a result, a difference may appear in accounting profits and profits calculated for taxation.
Now going back to the concept of deferred income tax, this usually happens because of this difference.
Companies may calculate tax on the basis of accounting profits, while the IRS may want to add to the taxation liability later on. This results in deferred tax liability. Note that deferred tax is often but not always a liability. It may also be in the form of the asset, which is discussed later on.
So, why does it really happen?
Why Do You Have Deferred Income Tax in South Gate, CA?
A business is generally free to recognize expenses, within a certain limit, of course. On the other hand, the IRS may disallow certain expenses. A common example of this case is that of depreciation. If a business finds it suitable, it may decide to charge, say, 50% depreciation on tens of new vehicles within the first year. But it may not be allowed by the IRS.
The taxman sets specific rules for charging depreciation to different classes of assets. The businesses may want this due to various reasons. However, the IRS would want fair treatment of depreciation over expected lifetime.
Similarly, a business may want to give expensive meal vouchers to employees regularly. They may do so to compensate for the decrease in salary. It may happen because the shareholders wanted to decrease salary expenses. However, again, the IRS sets certain limits.
Due to any such reason, deferred tax liability may appear in the balance sheet. Basically, it is the difference between income tax paid and total tax owed to the IRS.
In some cases, however, it may also be in the form of deferred income tax assets.
This means that the company has overpaid and the IRS owes to the company. Again, this could happen due to a number of reasons.
In 2017, for example, the US Congress decreased income tax rates for companies. Some companies which had paid advance income tax on previous rates later claimed deferred tax assets. This means the IRS paid back the extra amount or adjusted it in the next payment cycle.
Another example could be when a company has suffered net operating loss but paid some taxes in previous quarters.
The important thing to remember is that it would be a rare instance for accounting profit to match IRS profit. Hence, deferred income tax liability (or asset) is a routine happening for companies. However, it is important to have the right professional help in the form of taxation experts. It helps to calculate taxes more effectively, and settle underpayments/ overpayments with the IRS without executives having to worry about it.
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Zee Maq is a content writer who specializes in writing business and finance content. She has nine years of experience and loves to provide problem-solving content to help people tackle challenges in their everyday lives.