Editor's Note: December is "Managing Your Year-end Month'" at Insightful Accountant, which includes a series of features to help you prepare for year-end. Look for both payroll and non-payroll topics. This feature discusses 'deferred tax' entries.
I know this is the holidays, which is why I generally write shorter features on Fridays. I thought about calling these pieces the "Forgetful Friday Features," but in many ways, they are too important to forget (even if they are short). So, the least that I can do is make them somewhat enjoyable.
Yesterday I wrote an article on how "Common Year-end Adjustments" impact the Balance Sheet and Profit and Loss Statement of a business using the accrual basis of accounting. Near the end of the piece, I emphasized how that especially in the case of depreciation and amortization, there can be significant differences between a company's books value and the reported value of these items for income tax purposes.
The same is true regarding many other adjustments I discussed, even though they are much starker concerning depreciation and amortization.
The reason for these differences rests with the fact that standard accounting practices generally governed by the Financial Accounting Standards Board (FASB) differ from tax accounting rules set by the Internal Revenue Service. Therefore, it is essential to consider these different standards when considering your year-end adjustments and their potential relationship to the year-end adjustments we discussed.
In addition to the adjustments, the article recommended that you might experience deferred tax assets, deferred tax liabilities, or both.
A deferred tax asset is an entry on the balance sheet of a business reducing its taxable income in the future. Probably the best example of this occurs when a business either overpays or prepays its taxes, and the business is due a tax refund, rebate or credit.
A deferred tax liability is a balance sheet entry that records taxes owed, but are not due until a future date. A common source of deferred tax liability is when a business owes unpaid taxes. Another example is the difference between tax value and book value regarding the carryover of tax losses.
Recently, finance expert, consultant and writer Chris Scott wrote an article for Intuit's "Firm of the Future Blog" titled, "What are Deferred Tax Assets and Deferred Tax Liabilities." The piece is an outstanding treatise of the topic—one I would encourage our accountants, bookkeepers and ProAdvisors review as year-end approaches. This is especially true if you are involved in tax return preparation.
Have a great Friday folks, and enjoy your weekend. As we march ever closer toward this month's holiday, be happy, safe and thankful.