Lesson 3 of 6 · 14 min

Deferred tax balances and income tax expense

Deferred tax balances equal temporary differences times the tax rate, and income tax expense equals taxes payable plus the period's change in those balances.

In short

  • Each balance sheet date: recompute every temporary difference and multiply by the tax rate to get the DTL and DTA balances.
  • Income tax expense = taxes payable + ΔDTL − ΔDTA. Only the change, not the balance, goes through the income statement.
  • A DTL means tax expense has run ahead of taxes owed: tax deferred to later. A DTA means tax owed has run ahead of tax expense (or losses are available to carry forward).
  • With only temporary differences, tax expense equals the tax rate times accounting profit.
  • As temporary differences reverse, a DTL shrinks and taxes payable exceed tax expense.

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Deferred tax balances and income tax expense · Analysis of Income Taxes