Which of the following items is most likely to result in the creation of a deferred tax item?
interest received on city gov bonds
Compensation paid in the future with shares of a company stock
Fines paid to the government to settle violations
Can someone pls help me understand the answer is B? Can’t wrap my head around it
Okay so I am not an accountant so I definitely defer to the accounting gurus on this forum, but here goes:
A. Municipal bonds are typically tax free, in terms of interest received. That’s what they seem to be describing here.
B. Employee stock option plans typically get deferred tax treatment. The options need time to vest after being granted. They seem to be describing an incentive stock option plan here.
C. Fines to settle government violations are typically not tax dedictible and the expense is realized when the fine is levied. That’s what they seem to be describing here.
Cheers - good luck - you got this👍
Deferred tax items are temporary.
Assuming interest received on city government bonds is tax exempt, then the difference between taxable income on the tax return and income before taxes on the income statement will be permanent, not temporary. Therefore, it will not create a deferred tax item.
Similarly for fines.