Summary: Deferred Taxes
In addition to depreciation, other expenses that generate deferred tax assets (or liabilities) include inventories due to different inventory accounting methods such as LIFO, FIFO, and average costs.
Notice that the differences between GAAP taxes and IRS taxes that create the deferred taxes are temporary (Exhibit 6.17): In the scenarios in Exhibit 6.16, the magazine will not record subscriptions as revenues under GAAP until they are delivered— but they will eventually get delivered.
GAAP | IRS | Reason for Difference | |
---|---|---|---|
Revenue | 100 | 102 | Different revenue recognition methods |
COGS | 20 | 20 | |
Depreciation and amortization | 10 | 17 | MACRS vs. straight-line depreciation |
Interest expense | 5 | 5 | |
Statutory tax rate | 35% | 35% | |
Pretax income (GAAP) | 65 | ||
Income tax expense (GAAP) | 22.75 | ||
Taxable income (IRS) | 60 | ||
Taxes payable (IRS) | 21 | ||
Net Income | 42.25 | 39 |
Similarly, the company recorded higher depreciation under MACRS (IRS) of the initial years in the useful life of a fixed asset because it is an accelerated method (vs. straight-line depreciation), but in the latter years of the asset’s useful life it will record a lower depreciation expense under MACRS than under straight-line depreciation.
In the long run, the sum total of revenue recognized or depreciation recorded will be the same under GAAP and tax accounting. The annual differences we discussed ...
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