Please explain deferred tax assets/liability and loss carryover



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hi,
i was unable to follow the term deferred tax assets/liability, in taxes, .can u pls explain me the term

1 Answer(s)


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Renu, very simply said, Deferred tax liability is tax that the company has to pay sometime in the future. Since this has to be paid definitely, the company accounts for this in the current financial period itself. Deferred tax liability basically occurs due to timing differences in depreciation policies of the company and the Income Tax department. For example the company might depreciate an asset for 4 years while the IT department will want the depreciation for 3 years. So since the depreciation amount is different (3 years versus 4 years), the operating profit and subsequently the tax payable will be different. Defred tax liability fixes this difference.

Deferred tax asset, is basically extra tax the company has already paid. This extra tax can be used to offset/net out future tax payments. Deferred tax assets can arise due to net loss carryovers.