Deferred Tax Liability (DTL) – Basics
In this video, we will discuss the
concept of deferred tax liability (DTL). Please first refer to the “depreciation methods” for the
basics of different asset depreciation methods. The following is a part of the
transcript. This video requires Flash 8 or above. If it does not start, click the
play button to start.
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When we discuss deferred tax
liability (DTL) and deferred tax asset (DTA), we should clearly imagine there
are two “sheets”. On the left is the income statement (representing
the accounting side, GAAP) and on the right is the tax return
“statement” (representing what the government sees).
We know that for a company, it has
to pay tax based on “income = revenue – expenses”. Here the
expenses include the depreciation of the assets. DTL and DTA are the results of
using different depreciation methods in the accounting statements and the tax
returns!
Firstly, understand 4 important
terminologies:
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|
Accounting |
Tax Return |
|
“income” |
Pre-tax income |
Taxable income |
|
“tax” |
(Income) tax expenses |
Tax payable |
Let’s work on one example to
understand how DTL is generated.
Assume we have an asset with useful
life of 3 years (and salvage cost = 0) and costs $6000. Every year, the income
before subtracting the depreciation is $4000. Tax rate is 30%. In the income
statement, we depreciate the asset for 3 years (so, each year $2000) for
accounting but 2 years for tax return purpose (so $3000/ year). We have the
following table (please refer to the videos on how we arrived
this table):
|
|
2005 |
2006 |
2007 |
Total |
|
Income before dep. |
4000 |
4000 |
4000 |
12000 |
|
Depreciation (acct) |
2000 |
2000 |
2000 |
6000 |
|
Pre-Tax Income |
2000 |
2000 |
2000 |
6000 |
|
Tax expenses |
600 |
600 |
600 |
1800 |
|
Depreciation (Tax) |
3000 |
3000 |
0 |
6000 |
|
Taxable Income |
1000 |
1000 |
4000 |
6000 |
|
Tax payable |
300 |
300 |
1200 |
1800 |
|
DTL |
300 |
600 |
0 |
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So you can see that by using faster depreciation in tax return, in the early years, the company only has to pay $300 tax instead of $600. However, because of this difference, the company has to record the fact that it is owing the government $300 as DTL (which is a liability).
In general, we have this important equation, which you must memorize for the exam:
Tax Expense = Tax Payable + Delta_DTL –
Delta_DTA
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[...] of tax rate changes the deferred tax liability (DTL). Please first refer to the basics of “Deferred Tax Liability”. The following is a part of the transcript. This video requires Flash 8 or above. If it does [...]
Excellent Explanation of Concepts. Thanks
Being an almost qualified accountant with just one paper left to fully qualifying ACCA exams I would say this is a very good explanation of deferred tax even if you are not well versed with underlying accounting entries.I have learned a thing or two. I would recommend this even to accountants who want to learn basics of deferred tax liability
This video is outstanding! I’m taking Level I right now and I will surely come back to this for review
Hi ALL, Just wanted to know How the last line (DTL) is calculated exactly in this Example
for Example in 2005 , Tax Expense = Tax Payable + Delta_DTL – Delta_DTA Tax Expense =Tax Payable + Delta_DTL -0(I assume Zero in this Example ) DTL= Taxpayable-Tax Expense =300-600 = 300 ( which is fine for 2005) But for 2006 Applying the same Steps =300-600 =300 (But it is stated as 600). I wanted to know Whether I am Missing out something
Txs for your Support Anand
amazing videos!
Great tips! I will try it definitely thanks for sharing this!
clear explaination.It’s straightforward and easy to understand!