[mjp44]

I am having a hard time grasping the concept of deffered tax. For instance, why do you subtract permanent differences from taxable income when calculating taxable liability? Is it because it is already included in taxable income? Also, can someone explain deferred tax liability vs deferred tax asset in a way that a third grader would understand?! Thanks!

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REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[gobias]

I just finished going over this topic and I had some trouble wrapping my head around it as well. DTL/A represents the future tax effect that arises from temporary differences.

So if you have higher tax depreciation than book depreciation in the current period, it must reverse in the future. That means, in the future, your tax depreciation will be lower than the books. Lower depreciation expense on the tax return means higher income and thus, tax. Therefore, you report a deferred tax liability to represent that you will have higher taxes at a future date.

I'm able to keep things in order by thinking about it like this: if current taxable income is LESS than current book income, it results in a deferred tax LIABILITY. If current taxable income is MORE than current book income, it results in a deferred tax ASSET.

TI < BI. less than=DTL

TI > BI. greater than=DTA

Not all permanent differences are subtracted from TI though. You have income from sources like municipal bonds which are not taxable for tax purposes, so you subtract from TI. But premiums paid on a life insurance policy where the entity is the main beneficiary are expensed on the books, but not deductible for taxes so you must add them back.

Hope this helps! Just keep at it and it will start to make sense eventually.

F - 86
R - 90
A - 97
B - 91

[mjp44]

Thanks GoBias! That makes more sense. It seems that the best way to remember to add/subtract permanent differences: if it is income then you subtract from TI if it is a nondeductible expense you just add it back in.

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[gobias]

I just realized I worded that last part incorrectly, but yeah, it sounds like you've got it. Non-taxable income is deducted from book income to arrive at taxable income, and non-deductible expenses are added back to arrive at TI.

Anytime!

F - 86
R - 90
A - 97
B - 91

[Anonymous]

A good way to remember deferred asset/liability is:

Deferred asset – more taxable income now, higher tax than you “wished” – IRS “owed” you => this is an asset

Deferred liability – less taxable income now, lower tax than IRS “wished” – you “owed” IRS => this is a liability

Hope that helps.

[Sudad]

DTA = it will have a tax benefit in the future

DTL = it is a tax burden in the future

On your first question, it depends on what kind of permanent difference. For example, insurance paid for officers are not taxable, and it is not deductible on the tax return. But, it is an expense on company's book. Another example, dividends recieved deduction is a tax deductible on the tax return, but not on the book.

DONE!!!

[Author]

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