I can't remember where, but I saw a great way to look at deferred taxes. Use a 5 column table. the first column is your pretax income on your income statement, column 2 is your taxable income on your taxes, column 3 are temporary differences that are taxable in this period but will be reportable in another period so TI>PTI (creating a DTL–meaning you are paying for it now, but will be booking it later), column 4 are temporary differences that are included in your pretax income, but are not yet taxable so PTI>TI (creating a DTA–meaning you are booking it now, but aren't paying it until later), and column 5 is for permanent differences–meaning it is included in pretax income, but will never be paid for.
Example: income statement reported $90,000 income before provision for income taxes. Year 1 data has rent received in advance of $16,000, Income from exempt municipal bonds of $20,000, and depreciation deducted for income tax purposes in excess of depreciation reported for financial statement purposes of $10,000. What is the DT at the balance sheet date of year 1?
Column1 Column 2 Column 3 Column 4 Column 5
Pretax income 90,000 76,000
Rent advance 16,000
Municpal bond income 20,000
Depreciation 10,000
Taxes at 30% 27,000 22,800 4,800 3,000 0
To calculate the taxable income you take the pretax income of 90,000 and add the rent advance because it is taxable when paid (+ 16000) and subtract the excess depreciation because it is deductible now (-10,000) and subtract the municpal bond income because it will never be taxed (-20,000). So pretax income = 76,000, DTL is 4,800, and DTA is 3,000, and current liability is 22,800.
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