I understand how a deferred tax liability arises in the case of an asset when the carrying value of the asset exceeds the tax base of the asset. If I am correct this is a result of, for example, S/L depreciation of the asset on the Financial Statement and accelerated depreciation for Tax Purposes. The resultant effect being that accounting profit is greater than taxable income - which leads to income tax expense > income tax payable and therefore a deferred tax asset.
In the case of a liability I am struggling to think of an example that would demonstrate how the tax base of liability would exceed the carrying value of a liability and therefore lead to a deferred tax liability. Any help?
Just think in the opposite direction in your own example and you will get a deferred tax liability
Another good example would be non-tax-deductible expenses. This type of expenses are real expenses for the company and probably presented in financial statements for financial purposes. However, the “National Tax Bureau Institution” (whatever it could be named in any country) will not allow those expenses as tax deductible, so your financial statement for financial purposes shows a lower pre-tax income, hence a lower tax expense that it is in reality. In this case, the company must show a deferred tax liability in its balance sheet.
The most simple and common case of a deferred tax liability is the timing difference between taxable fiscal year and the cash tax payment , which is in the next year in many countries. I explain, you prepare financial statements for tax purposes for year 2016 and you say you must pay US$ 2 million. However, during 2016, the company has only paid US$ 1.8 million, so US$ 0.2 million will appear as a deferred tax liability on the BS until that liability is honored.
Expenses that are not tax-deductible will result in permanent differences between income for tax purposes and income for accounting purposes. Permanent differences _ do not _ create DTAs or DTLs; only temporary differences do.
