What is Deferred Tax?
The tax you will pay or save later because the books and the tax return recognize items at different times.
Deferred Tax: definition
Accounting profit and taxable profit rarely match in a given year because rules differ on timing - depreciation methods, revenue recognition, provisions, and loss carryforwards. Deferred tax reconciles the two over time. A deferred tax liability means you will pay more tax later (you deferred it); a deferred tax asset means you will pay less later (you prepaid it, or carry losses forward).
- Deferred tax liability: book profit recognized before taxable profit (e.g. accelerated tax depreciation)
- Deferred tax asset: deductible items or losses that reduce future tax (e.g. NOL carryforwards, accrued expenses)
- Measured at the tax rate expected when the difference reverses
- A valuation allowance reduces a deferred tax asset if future use is not more likely than not
How Fintra handles it
Because Fintra holds both book entries and the data behind the tax view, it can surface the temporary differences that create deferred tax - depreciation, deferred revenue, accruals - rather than leaving them to a year-end reconciliation. Deferred tax balances are drafted with their source differences shown, and a named human (or your tax advisor) approves the treatment.
- Temporary differences identified from book vs. tax treatment on the same records
- Deferred tax assets and liabilities drafted with supporting detail
- Effective tax rate reconciliation ties book tax to cash tax
Worked example
Frequently asked questions
What is the difference between a deferred tax asset and liability?
A deferred tax asset represents future tax savings - from deductible temporary differences or loss carryforwards that will lower tax later. A deferred tax liability represents future tax payments - from items taxed later than they are booked, such as accelerated tax depreciation.
What causes deferred tax?
Temporary differences between book and tax treatment: depreciation methods, revenue recognition timing, accrued expenses not yet deductible, provisions, and net operating loss carryforwards. Permanent differences (like non-deductible fines) do not create deferred tax.
What is a valuation allowance?
A reduction to a deferred tax asset when it is not more likely than not that the future tax benefit will be realized - for example, if a company may not generate enough future taxable income to use its losses. It effectively writes the asset down to the amount expected to be used.
Does deferred tax affect cash flow?
Not in the period it is recorded - it is a non-cash accounting item reconciling book and tax profit. It affects cash later when the temporary difference reverses and actual tax paid changes. On the cash flow statement, deferred tax is adjusted out of net income.
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