Deferred Tax Calculator

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Overview of Deferred Tax Calculator

To understand deferred tax, it shall be noted at the outset that as per the accounting standards followed by companies, there are two different financial reports which an organisation prepares every fiscal year – an income statement and a tax statement.

The primary motive behind the creation of two different financial reports is varying guiding principles which govern the recording of companies’ income and their taxation.

In other words, the guidelines behind the preparation of a company’s income statement and tax statement are slightly different. Hence, sometimes the numbers mentioned in both these reports might vary.

It is this disparity that creates the scope for deferred tax. The term deferred tax, in essence, refers to the tax which shall either be paid or has already been settled due to transient inconsistency between an organisation’s income statement and tax statement.

As per this definition, there are two types of deferred tax-deferred tax asset and deferred tax liability.

A deferred tax of any type is recorded in the balance sheet of an organisation; however, their point of generation is typically in the income statement. It is crucial to note that deferred tax is only recorded in the books of an organisation if chances of a reduced or increased tax liability in the future are more likely to occur than not.

Benefits of Deferred Tax

As the temporary difference in two statements creates the scope for deferred tax, there is no pronounced benefit to it per se. However, recognising such liabilities allows an organisation to be financially prepared for future expenses. On the other hand, recognition of deferred tax assets can significantly reduce tax liabilities for the future.

Scenarios in which Deferred Tax is Recorded?

As mentioned previously, there are multiple occasions or financial events on account of which deferred tax asset or liability is created. A few of these events are mentioned below –

  • Difference in the depreciation calculation method

    A deferred tax can be created when there is a difference between the approach in which a company calculates depreciation on its assets and the method of depreciation calculation as prescribed by the Income Tax Department.

  • Difference in Depreciation Percentage

    If there is a difference in the percentage of depreciation calculated by an organisation on its assets and considered by the IT department, then a deferred tax can be created.

  • Gross loss

    Deferred tax asset is created when a company realises gross loss in a particular year. It creates an opportunity for a company to carry forward it to the next year to be adjusted with subsequent profits, thus reducing that year’s tax liability. Deferred tax asset or DTA is recorded in the year when such loss is realised.