Introduction to Income Taxes and Deferred Tax Accounting
Why Deferred Taxes Exist
Companies often report different amounts of income for financial reporting and tax reporting because accounting standards and tax laws have different objectives. Financial accounting focuses on providing useful information to investors, while tax accounting follows laws designed to determine taxable income. These differences create deferred tax assets and deferred tax liabilities.
Deferred tax accounting ensures that income tax expense reported in the financial statements reflects the accounting income earned during the period rather than simply the taxes currently payable.
Note
Deferred taxes arise from temporary differences—not permanent differences.
- Financial accounting follows U.S. GAAP.
- Tax accounting follows tax laws.
- Temporary differences create deferred taxes.
- Permanent differences affect the effective tax rate but never reverse.
Summary
Deferred tax accounting matches tax expense with accounting income by recognizing the future tax effects of temporary differences.