One thing that Im still confused about is what happen to DTA, DTL and the tax amount when tax rate changes. Can someone explain it to me?
Let’s say you have a deferred tax asset of $10,000, a deferred tax liability of $5,000 and the tax rate changes from 40% to 30%. You used to expect to save $10,000 in taxes in future years because of your deferred tax asset. But rates have been reduced by 25%. That means you can now only expect to save $7,500 in future years. You used to expect to have to pay $5,000 more in tax in future years because of your deferred tax liability. Now, with the lower rates, you only need to pay $3,750. The net impact is that you expect net savings of $3,750 on future taxes rather than $5,000. You expect future tax savings of $1,250 less than you used to. What happens to income tax expense and taxes payable? Assume you have pretax income and taxable income of $100,000. Taxes payable declines from $40,000 to $30,000. Income tax expense before the change would have been $40,000, but now it is equal to $30,000 + (-1250) - (-2500) = $31,250. The incremental $1,250 will cause retained earnings to be lower by that amount in the next period, which matches and balances the net reduction in deferred tax assets.