As mentioned above, there are various factors that can result in Deferred Tax Liability for businesses. Let’s discuss them in brief:
Depreciation and Deferred Tax Liability Rate: Depreciation is calculated after taking into account the cost, residual value, and usefulness of an asset, as per the Companies Act.
However, there are differences between the depreciation rates laid under the Companies Act and the Income Tax Act . This variation leads to a temporary difference, resulting in the deferred tax liability.
Recognition of Expenses: When a company records certain expenses in its account statements before they are deductible for taxes, it results in deferred tax liability.
For example, expenses on advertisement are not allowed by the Income Tax Department but are recorded in the financial statements of the company. Here is what the tax and income statements in the company look like:
Income Statement of the Company
Advertisement Expenses
Tax Statement of the Company
Advertisement Expenses (Disallowed by Income Tax Department)
Changes in Income Tax Laws
Variations in income tax laws can also impact the deferred tax liability for businesses. For instance, if the corporate tax rate is decreased, the deferred tax liability will be lowered. As a result, the future tax liability will be decreased.
Carry Forward of Taxable Gains
In some cases, companies carry forward their taxable gains or profits to the upcoming years with an objective to lower their tax burden. This results in the creation of deferred tax liability. If the company faces a loss, it carries it forward to offset against taxable profits in the subsequent years.
These are some of the most common factors that lead to deferred tax liability. Now that you are familiar with its causes, let’s take a look at how DTL is calculated.