Deferred tax accounting reflects the future tax consequences of differences between financial accounting and tax reporting.
A company’s financial statement income may differ from its taxable income because accounting standards and tax rules recognize certain items differently. Deferred tax accounting records the future effects of these differences as deferred tax assets or liabilities.
What causes these differences?
Common examples include:
- Depreciation: An asset’s cost is deducted over different periods or using different methods for accounting and tax purposes.
- Accrued expenses and allowances: An expense is recognized in the financial statements before it becomes deductible for tax purposes.
- Tax loss carryforwards: A tax loss may offset future taxable income, subject to applicable restrictions.
Differences that reverse in future periods are called temporary differences. Permanent differences, such as certain expenses that are never tax-deductible, generally do not create deferred tax assets or liabilities. Reference: FASB, Income Taxes — Topic 740
What are deferred tax assets and liabilities?
A deferred tax asset represents a future tax benefit from deductible temporary differences, tax loss carryforwards, or similar items. It does not necessarily represent a cash refund.
A deferred tax liability represents a future tax obligation arising from taxable temporary differences.
For example, faster depreciation for tax purposes may reduce taxable income today but leave fewer deductions available in future years, creating a deferred tax liability.
Under U.S. GAAP, deferred taxes are measured using enacted tax laws and rates expected to apply when the differences reverse. Reference: FASB, Summary of Statement No. 109, the predecessor to ASC 740
Can a company recognize a deferred tax asset when it has losses?
A tax loss does not automatically support recognizing the full related tax benefit.
Under U.S. GAAP, a valuation allowance is required for the portion of a deferred tax asset that is more likely than not to remain unrealized. This assessment considers future taxable income, utilization restrictions, and other relevant evidence. Reference: ASC 740 accounting policy example filed with the SEC
How does this differ from preparing a tax return?
A tax return calculates taxable income and tax liability under tax law. An income tax provision under ASC 740 addresses current and deferred income tax expense or benefit for financial reporting. Completing a tax return therefore does not necessarily complete the financial statement tax calculation. Reference: FASB, Income Taxes — Topic 740
Japanese-owned businesses may also need to coordinate their calculations with the accounting policies used by their parent company.
How We Can Help
Threefold Hara CPA assists with identifying temporary differences, calculating deferred tax assets and liabilities, and assessing valuation allowances while coordinating tax returns and financial reporting.
This article provides general information. The appropriate accounting treatment depends on applicable accounting standards, tax laws, and company-specific circumstances.
Information reviewed: October 15, 2026
