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In: Business and Management

Submitted By etsemochi
Words 1306
Pages 6
M aking Sense of
Deferred Tax
Assets and
 Facebook (


by Patricia Poladian (
/patriciapoladian/) on Jun 29, 2015

If you have your financial statements prepared for lenders or investors, your accountant may have noted deferred tax assets or deferred tax liabilities on your balance sheet. These assets and liabilities can

directly affect your company’s cash flow for subsequent years, so it’s important to understand what yours represent and how likely you are to realize them.

What Creates Deferred Tax Assets and
The revenue and expenses you report on your income statement don’t always translate into income and deductions for tax purposes. Tax accounting and financial accounting have slightly different rules, which is why your business's taxable income isn’t always the same as the net income on your financial statements. Some of these instances result in permanent tax differences. For example, interest income from municipal bonds is excluded from taxable income, and half of meals and entertainment expense is always disallowed. Other differences are temporary.
These differences have to do with timing. You’ll end up recognizing the income and expenses eventually, but you just may recognize them sooner under one system than you do under the other.

A classic example of a temporary difference is financial and tax depreciation
( Both

systems allow depreciation, but tax laws allow you to accelerate your depreciation faster than you can under financial accounting. That means that, in early years, you may be able to claim a $5,000...

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