Essay: Causes of Deferred Tax Assets

Sample Essay

Deferred tax assets are the deductible amounts from taxes in the future of a business. The causes of deferred tax assets include differences caused by recognizing expenses earlier in GAAP income statement and recognizing revenues earlier in the tax returns. These differences include recognition of accrued expenses in the GAAP financial statements such as rent, utility and salaries. Recognized losses which arise due to fair value or the calculation of inventory by lower of cost or market value in the shareholders’ income statement also cause differences in income tax expense and tax payable. The recognition of advance revenues received in the tax returns and not in the shareholders’ income statement also results in differing tax amounts and causes deferred tax assets (Financial Accounting Standards Board, 1992).

Valuation Allowance

The valuation allowance account is created to record changes in deferred tax assets when there is a probability that these assets will not be realized. The amount of deferred tax assets which do not have a probability of realization are transferred to the valuation allowance account. The total valuation allowance recognized is disclosed in the balance sheet of the company. The total changes in the valuation account are also disclosed in the balance sheet.  Deferred tax assets are a result of the temporary differences in the income tax expense on the GAAP income statement and taxes payable on the tax returns and these deferred tax assets are tax deductible in the future. This implies that the recognition of valuation allowance account also affects the effective tax rate of the company as it increases the income tax expense when deferred tax assets are not recognized (Mulford & Comiskey, 2002).

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