Sign up  |  Log in

taxes payable vs DTL q2 practice problems

In question 2 of the Income Tax practice questions, the text mentions that “the taxes that a company must pay in the immediate future are taxes payable” rather than a DTL. I found this quite confusing - if the company is paying tax in 2009 on income earned in 2008, wouldn’t that imply that the company’s income tax expense (from accounting treatment) was greater that the income tax payable (from tax treatment) in 2008 hence creating a DTL? Is there anything in the text that explains this in further detail? I feel like I may have missed something in the text or am just having a stupid moment. 

" Wiley's prep material was a huge part of my success." - Lindsey G., USA

Deferred tax assets and liabilities come from deductible/taxable temporary differences - these are generally formed from temporary differences in the tax base of assets and liabilities. As these differences are temporary, the changes over the deferred tax asset/liability over time (the decrease/increase of dta/dtl) affect the accounting figure of tax in the financial statements. It has little to do with payments of tax to authorities (inasmuch that dtl/dta is not a liability to be directly paid/deducted). Do not confuse it with taxes payable, which is the amount that needs to be paid to the authorities, which is calculated based on the prior period’s profit before tax.

An example would probably would make it clearer:

- Say corporate tax rate is 30% 

- In the balance sheet, a company has a DTL of 250 as at 31 Dec X1 due to temporary difference in taxable and accounting base of fixed assets (1000 tax base 750 accounting base) and 275 as at 31 Dec X2 (1100 tax base 825 accounting base). 

- In the P&L, Profit before tax is 1000. This is accounting profit. To reach taxable profit, you would need to adjust the accounting profit a bit (depreciation is usually not recognized as taxable expense, while tax authorities usually allow capital allowances instead). This adjustment would lead to a taxable profit of say 900. As corporate tax rate is 30%, the tax payable for the year would be 270. Tax expense in the P&L, however, would be 295 (the tax expense payable + the change of the deferred tax liability).

- When the period X2 is closed, the entity may have paid say 50% of its tax payable. Thus, on the balance sheet at some point in X3, it would have a taxes payable to the authorities of 135 in short-term liabilities. It would also have deferred tax liability of 275 in long-term liabilities.     

Hope the example brings a bit more clarity in the differences between these concepts. Perhaps it would be best if you go through the section again, and especially the blue boxes/eoc listed.