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| Corporate Practice bd |
What is Deferred Tax ? Temporary and Permanent Differences-With Examples
Deferred Tax:
Deferred tax refers to the tax effect of temporary differences between the carrying amounts of assets and liabilities in financial statements and their tax bases, which will either result in taxable amounts or deductible amounts in future periods when the carrying amounts of assets and liabilities are recovered or settled.
Temporary Difference:
Temporary differences are differences between the carrying amount of an asset or liability in the financial statements and its tax base that will result in taxable or deductible amounts in future periods. These differences reverse over time, causing future tax liabilities or assets to arise.
Permanent Difference:
Permanent differences, on the other hand, are differences between taxable income and accounting income that originate in one period and do not reverse subsequently. These differences result in tax-exempt income or non-deductible expenses that are permanently excluded from taxable income.
In summary:
Deferred Tax:
Reflects the tax effect of temporary differences between financial statement carrying amounts and tax bases.
Temporary Difference:
Arises when the tax base of an asset or liability differs from its carrying amount, leading to future tax effects.
Permanent Difference:
Arises from items that affect taxable income but do not affect accounting income, resulting in non-reversible tax effects.
Understanding these concepts is crucial for accurately calculating and reporting deferred tax assets and liabilities in financial statements, as they impact a company's overall tax liabilities and financial position.