Deferred income tax expense is an expense that is recognized in gross profit based on the expected tax or deduction when there is a difference between accounting standards and tax laws. The calculation of deferred tax expense is carried out in accordance with the relevant accounting and tax law provisions. Here's a closer look at the deferred tax expense calculation:
1.Determination of temporary differences.
The calculation of deferred tax expense first requires the determination of temporary differences. Temporary differences are differences between accounting standards and tax laws that result in inconsistencies between future accounting profits and tax profits. Common temporary differences include bad debt provisions, depreciation of fixed assets, delayed revenue recognition, and more.
2.Determine the tax rate.
The calculation of deferred tax expense is also subject to the applicable tax rate. The determination of the tax rate needs to be carried out according to the expected future tax situation and the provisions of the tax law. In general, deferred tax expense is calculated using the currently applicable statutory income tax rate.
3.Identify deferred tax assets or liabilities.
Deferred tax assets: When the taxable profit of a business in the current accounting period is higher than the tax profit, it will lead to a decrease in the tax deductible in the future, and this difference forms a deferred tax asset. Deferred tax assets are calculated as follows: Deferred tax assets = Undistributed profits Tax rate.
Deferred tax liability: When a company's taxable profit in the current accounting period is lower than its tax profit, it will lead to an increase in the tax that needs to be paid in the future, and this difference forms a deferred tax liability. Deferred tax liabilities are calculated as follows: Deferred tax liabilities = Undistributed profits Tax rate.
Deferred tax assets represent the amount of tax that a company can reduce in the future, while deferred tax liabilities represent the amount of additional tax that a company will need to pay in the future. The formula calculation of deferred tax assets or liabilities combines temporary differences with applicable tax rates to reflect the company's future tax situation.
It is important to note that the amount of deferred tax assets or liabilities may change due to changes in tax laws and accounting standards. Changes in tax rates, changes in applicable tax laws, etc., may result in changes in the calculation of deferred tax assets or liabilities.
4.Deferred income tax expense calculation formula
Deferred tax expense is the difference between a deferred tax asset and a deferred tax liability. Deferred tax expense is calculated as follows: Deferred tax expense = Deferred tax liability - Deferred tax assets.
5.Factors affecting deferred tax expense:
Different measurement bases of assets and liabilities: Enterprises use different measurement bases in accounting and tax reports, such as depreciation methods for fixed assets, inventory valuation methods, etc. These differences result in changes in deferred tax expense.
Differences in investment valuation: There may be differences between the tax impact factors considered by enterprises in investment decisions and the actual tax situation, which may affect the calculation of deferred tax expense.
Amortization of goodwill and intangible assets: Amortization of goodwill and intangible assets may differ in accounting and tax reporting, which in turn affects the calculation of deferred tax expense.
6.Analysis of the influencing factors of deferred tax expense:
Changes in operating conditions: Changes in the operating conditions of a business will directly affect the calculation of deferred income tax expense. For example, an increase or decrease in profitability can lead to a change in deferred tax expense.
Changes in tax rates: Changes in tax rates can also have an impact on deferred tax expense. When the tax rate increases, the deferred tax liability increases, which leads to an increase in the deferred tax expense.
Business restructuring: Business restructuring, such as restructuring, merger, division, etc., will have an impact on deferred income tax expense.
In summary, the calculation of deferred tax expense involves the determination of temporary differences, the determination of tax rates, and the calculation of deferred tax assets or liabilities. Accurate calculation of deferred tax expense is important to properly reflect the financial position and operating results of a business. Enterprises should follow the relevant accounting standards and tax laws to properly handle the calculation and disclosure of deferred tax expenses to ensure the accuracy and compliance of financial reports.