Brief Definition
Deferred taxes refer to the tax liabilities or assets that a company recognizes due to differences between the accounting treatment of income and expenses and their treatment for tax purposes. These differences can arise because certain items are recognized in one period for accounting purposes but in another period for tax purposes.
Further Explanation
Deferred taxes refer to the tax liabilities or assets that a company recognizes due to differences between the accounting treatment of income and expenses and their treatment for tax purposes. These differences can arise because certain items are recognized in one period for accounting purposes but in another period for tax purposes. Deferred tax liabilities occur when a company has to pay more tax in the future due to current temporary differences, while deferred tax assets arise when the company will pay less tax in the future because of these differences.
Example:
A company purchases equipment for $100,000. For accounting purposes, the company depreciates the equipment over 10 years using the straight-line method, resulting in $10,000 of depreciation expense each year. For tax purposes, the company uses an accelerated depreciation method, resulting in $20,000 of depreciation expense in the first year. This creates a temporary difference, leading to a deferred tax liability. In the first year, the tax expense is lower due to higher depreciation, but in future years, the company will have higher tax expenses as the depreciation for tax purposes will be lower than for accounting purposes.