taxes for dummy (quick question)

CFA Level I
#1

so let’s say: 1st year: DTL = 300 2nd year: tax expense < tax payable , 500 - should we create DTA = 500 or DTL is being reversed and DTA = 500-300=200? always getting confused here…

#2

i think this is what you’re saying: yr 1: DTL = 300 yr 2: DTA = 500 Net deferred taxes would make this a deferred tax asset of 200.

#3

thx and these 200 are also called DTA? for the same time period?

#4

I don’t understand, if first year you have DTL of 300k. Second year your Pretax Income < Taxable Income, Then again, you’d have to create a DTL. Where did you get DTA in picture? or may be I have it all confused.

#5

if taxable income>pretax income=DTA if pretax income>taxable income=DTL

#6

Right. phew!!! My my. this is a bummer, but I’ll always think warranty with DTA, and Depreciation with DTL.

#7

all right i’ll put it differently So a firm can have both DTA and DTL in the same year. No 6-grade math (cancelling each other in order to find net def. taxes)?

#8

gogiants, the first year you have a DTL of 300. assuming there were no previous deferred taxes, the cumulative deferred tax account would be a 300 DTL. the second year you have a DTA of 500. for the year, the DTA is 500. but since you had a DTL from the previous year of 300, when you net both of these, you end up with a DTA of 300. so for the year, DTA = 500. cumulatively, you have a DTA of 300. get it? pepp, when pretax income (financial reporting) < taxable income (tax reporting), then income tax expense (financial reporting) < taxes payable (tax reporting). Thus, the taxes you are actually paying to the IRS are greater than the taxes you are reporting in your financial statements which go to the SEC. when you are “paying too much” on your taxes, you can recognize the difference in future years (assuming it is temporary). thus you have a DTA. it is something of value to the company. they can use this asset in the future to offset other deferred taxes. i hope i’m making sense…lol

#9

thanks, topher!