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Deferred tax

Ruchi Khiwasra (Article) (26 Points)

23 May 2013

My client is a company, which failed to create deferred tax asset (against the preliminary expenses incurred) in its first year of operation.The same were disclosed as miscellaneous asset in balancesheet. Whether I should take the effect of those preliminary expenses in calculation of deferred tax in the current year?

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Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (3303 Points)
Replied 23 May 2013

Originally posted by : Ruchi Khiwasra
	My client is a company, which failed to create deferred tax asset (against the preliminary expenses incurred) in its first year of operation.The same were disclosed as miscellaneous asset in balancesheet. Whether I should take the effect of those preliminary expenses in calculation of deferred tax in the current year?

DEFERRED TAX ASSET

When the depreciation for the books (SLM) is higher than the depreciation for income tax (WDV), then the company's taxable income is higher than its actual income, as lesser depreciation is deducted from the total income than the actual depreciation. Consequently, the company pays more income tax than it rightfully should, on account of the “temporary difference”. This temporary difference is called a “deferred tax asset” and can be carried forward by the company in its balance sheet and used to set-off future taxes.

DEFERRED TAX LIABILITY

On the other hand, the depreciation for books (SLM) can be lower than the depreciation for taxation (WDV), or the asset may be written off in the books (making the depreciation nil) but has some depreciable value for income tax. In this case, the taxable income of the company will be lower than the actual income, as more depreciation has been deducted from the total income than the actual depreciation. Hence, the company ends up paying lesser tax than it actually should be paying, again on account of the “temporary difference”. This time, the temporary difference is a “deferred tax liability” and has to be carried forward in the books in the balance sheet.