'Deferred Tax’
What is a 'Deferred Tax Asset'
Deferred
tax asset is an accounting term that refers to a situation where a business has
overpaid taxes or taxes paid in advance on its balance sheet. These taxes are
eventually returned to the business in the form of tax relief, and the
over-payment is, therefore, an asset for the company. A deferred tax asset can
conceptually be compared to rent paid in advance or refundable insurance
premiums; while the business no longer has cash on hand, it does have
comparable value, and this must be reflected in its financial statements.
BREAKING DOWN 'Deferred Tax Asset'
Deferred tax assets
are often created due to taxes paid or carried forward but not yet recognized
in the income statement. For example, deferred tax assets can be created due to
the tax authorities recognizing revenue or expenses at different times than
that of an accounting standard. This asset helps in reducing the
company’s future tax liability. It is important to note that a deferred
tax asset is recognized only when the difference between the loss-value or depreciation of the asset is expected to offset future profit.
How Deferred Tax Assets Arise?
The
simplest example of a deferred tax asset is the carry-over of losses. If a
business incurs a loss in a financial year, it usually is entitled to use that
loss in order to lower its taxable income in following years. In that sense,
the loss is an asset.
Another scenario where deferred tax
assets arise is where there is a difference between accounting rules and tax
rules. For example, deferred taxes exist when expenses are recognized in the income statement before
they are required to be recognized by the tax authorities or when revenue is
subject to taxes before it is taxable in the income statement. Essentially, whenever the tax base or
tax rules for assets and/or liabilities are different, there is an
opportunity for the creation of a deferred tax asset.
Deferred Tax Liability
A deferred
tax liability is an account on a company's balance
sheet that
is a result of temporary differences between the company's accounting and tax carrying
values, the anticipated and enacted income tax rate, and estimated
taxes payable
for the current year. This liability may be realized during any given year,
which makes the deferred status appropriate.
Because there are differences
between what a company can deduct for tax and accounting purposes, there is a
difference between a company's taxable income and
income before tax. A deferred tax liability records
the fact the company will, in the future, pay more income tax because
of a transaction that took place during the current period, such as an installment sale receivable.
BREAKING DOWN 'Deferred Tax Liability'
Because
U.S. tax laws and accounting rules differ, a company's earnings before taxes on
the income statement can
be greater than its taxable income on a tax return,
giving rise to a deferred tax liability on the company's balance
sheet . The deferred tax liability represents a future tax payment
a company is expected to make to appropriate tax authorities in the future, and
it is calculated as the company's anticipated tax rate times the difference
between its taxable income and accounting earnings before
taxes.
Examples of Deferred Tax Liability Sources
A
common source of deferred tax liability is the difference in depreciation expense
treatment by tax laws and accounting rules. The depreciation expense for
long-lived assets for financial statements purposes
is typically calculated using a straight-line method, while tax regulations
allow companies to use an accelerated depreciation method.
Since the straight-line method produces lower depreciation when compared to
that of the under accelerated method, a company's accounting income is
temporarily higher than its taxable income. The company recognizes the deferred
tax liability on the differential between its accounting earnings before taxes
and taxable income. As the company continues depreciating its assets, the
difference between straight-line depreciation
and accelerated depreciation narrows, and the amount of deferred
tax liability is gradually removed through a series of offsetting accounting
entries.
Another common source of deferred
tax liability is an installment sale, which is the revenue recognized when a
company sells its products on credit to be paid off in equal amounts in the
future. Under accounting rules, the company is allowed to recognize full income
from the installment sale of general merchandise, while tax laws require
companies to recognize the income when installment payments are made. This
creates a temporary positive difference between the company's accounting
earnings and taxable income, as well as a deferred tax liability.
Deferred Income Tax
A deferred income tax is a liability recorded
on the balance sheet that
results from a difference in income recognition between tax laws and accounting methods.
For this reason, the income tax payable for
a company may not equate to the total tax expense reported. The total tax
expense for a specific fiscal year may
be different than the tax liability owed
to the IRS as the company is postponing payment based on accounting rule
differences.
BREAKING DOWN 'Deferred Income Tax'
Situations may
arise where the income tax payable on the tax return is greater than the income
tax expense on the financial statements. When this occurs, previous balances of
deferred income tax liabilities are extinguished. In time, if no other
reconciling events occurred, the deferred income tax account would net to $0.
However, if there was no deferred income tax liability account, a deferred
income tax asset would be created. This account would represent the future
economic benefit expected to be received because income taxes were charged in
excessed based on GAAP income.
Financial Accounting vs. Tax Accounting
Financial
accounting standards are guided by generally accepted accounting principles
(GAAP). GAAP accounting requires calculation and disclosure of economic events
in a specific manner. In addition, income tax expense — a financial accounting
account — is calculate using GAAP income. Meanwhile, the Internal Revenue
Service (IRS) tax code specifics certain rules on the treatment of events. The
differences between these two sets of guidelines result in different
computations in net income and the subsequent income taxes due on that income.
Financial Statement Classification
A
deferred income tax liability is classified on the balance sheet. However, it
may be classified as either a short-term liability or long-term liability
based. If the deferred tax liability is presumed to be paid in the next 12
months, it must be recorded as a current liability. Otherwise, it is of a
long-term nature. Deferred income tax liabilities are the difference between
the income tax expense reported on the income statement and the income tax
payable reported on the balance sheet.
Example of Deferred Income Tax
The
most common situation that generates a deferred income tax liability is from
differences in depreciation methods. GAAP allows for businesses to choose
between multiple depreciation methods. However, the IRS requires use of one
depreciation method different from all GAAP methods. For this reason, the
amount of depreciation recorded on the financial statements is commonly
different than the calculations found on a company’s tax return. Over the life
of the asset, the value of the depreciation in both areas changes, and at the
end of the life of the asset, no deferred tax liability exists as total
depreciation between the two methods is equal
Income
Tax
An income tax is a tax that governments impose on financial
income generated by all entities within their jurisdiction. By law, businesses
and individuals must file an income tax return every
year to determine whether they owe any taxes or are eligible for a tax refund.
Income tax is a key source of funds that the government uses to fund its
activities and serve the public.
BREAKING DOWN 'Income Tax'
Most countries
employ a progressive income tax system in which higher-income earners pay a
higher tax rate compared to their
lower-earning counterparts. The first income tax imposed in America was during
the War of 1812. Its original purpose was to fund the repayment of a $100 million
debt that was incurred through war-related expenses. After the war, the tax was
repealed, but income tax became permanent during the early 20th century.
In the United States, the Internal
Revenue Service (IRS) collects taxes and enforces tax law. The IRS employs a complex
set of rules and regulations regarding which income must be reported and which
deductions and credits filers may claim. The agency collects taxes on all forms
of income, including wages, salaries, commissions, investments and business
earnings.
Individual Income Tax
Most individuals do not pay tax on all of their income.
Rather, the IRS offers a series of deductions, including mortgage interest, a
portion of medical and dental bills, education expenses and several others,
which taxpayers subtract from their gross income to determine their taxable
income. For example, if a taxpayer earns $100,000 in income and qualifies for
$20,000 in deductions, the IRS only taxes the remaining $80,000. Then, the
agency applies credits to the taxes owed. To illustrate, if an individual owes
$20,000 in taxes but qualifies for $4,500 in credits, he only owes $15,500 in
tax.
Business Income Taxes
Businesses
also pay income on their earnings, and the IRS considers corporations,
partnerships, self-employed contractors and small businesses to be businesses.
These entities report their business income, and then deduct their operating
and capital expenses. The difference is their taxable business income.
State and Local Income Tax
In
addition to federal income taxes, many states in the United States also levy
income taxes. As of 2016, only seven states do not levy income taxes on their
citizens, and they include Alaska, Florida, Nevada, South Dakota, Texas,
Washington and Wyoming. New Hampshire and Tennessee only collect income tax on
earnings from dividends and investments.
Income tax exists in contrast to
property tax and sales tax.
Property Tax and Sales Tax
Property
tax is levied on properties based on their assessed values. The business,
person or other entity who owns the property must then remit the tax to the
governing authority of the jurisdiction. In the United States, municipal or
county governments typically levy property taxes. Sales taxes are applied to
goods purchased by consumers, and are levied by federal, state and local
authorities.
Income Tax Payable
Income tax payable
is a type of account in the current liabilities section
of a company's balance sheet comprised
of taxes that must be paid to the government within one year. Income tax
payable is calculated according to the prevailing tax law in the company's home
country. The taxes are calculated on the company's net income according
to its corporate tax rate;
if a company is due to receive a tax benefit from
its revenue agency, the amount of income tax payable will decrease.
BREAKING DOWN 'Income Tax Payable'
Income
tax payable is usually a current liability, because the debt is anticipated to
be extinguished within the next year. However, any portion of income tax
payable not attributable for payment within the next 12 months is considered a
long-term liability.
Types of Income Taxes Payable
Income
taxes payable encompass levies assessed at the federal, state and local levels.
The dollar amount is the amount that has accrued since the company’s last
income tax return. In general, payroll taxes,
property taxes and sales taxes are
listed as separate liabilities.
Income Tax Payable vs. Income Tax Expense
Income
tax expense is calculated by a business based on generally accepted accounting principles (GAAP). This
figure is listed on the income statement and
is usually the last expense line item listed before net income is calculated.
Upon completing a federal income tax return,
a business knows the true amount of taxes owed, which is reflected as a tax liability. A
difference arises between income tax expense and income tax liability because
the two sets of rules – GAAP and the Internal Revenue Service tax code – do not
treat all items the same.
An example of this difference arises
when depreciating assets. GAAP allows for numerous different methods of
depreciation that all typically result in different expense amounts by period.
The tax code, however, has more stringent rules that limit acceptable
depreciation methods. The use of these two depreciation methods for two
different purposes create a difference in the tax expense and the tax
liability.
Deferred Tax Liability
Income
tax payable is one component necessary in calculating an organization's deferred tax liability.
A deferred tax liability arises when a difference is reported between a
company's income tax liability and income tax expense. This difference may
arise due to the timing of when the actual income tax is due. For example, a
business may owe $1,000 in income taxes when calculated using accounting standards.
However, if it only owes $750 on its income tax return, the $250 difference is
expected to be a liability in future periods. The difference arises because
rule differences cause some liability to be deferred to a future period.
Future
Income Tax
BREAKING DOWN 'Future Income Tax'
In simple terms future income tax is an adjustment
accounting for the difference between what the company has already paid in
taxes on the current
income and what they will have to pay in the future for this
income. This difference occurs because companies are taxed by government in a
different way than from the way they calculate tax on their accounting
records.
Tax
Return
What is 'Tax Return'?
A tax return is the tax form or
forms used to report income and file income taxes with tax authorities such as the Internal
Revenue Service (IRS) in the United States. Tax returns
allow taxpayers to calculate their tax liability and
remit payments or request refunds, as the case may be. In most countries, tax
returns must be filed every year for an individual or business that received
income during the year, whether through wages, interest, dividends, capital gains or
other profits.
BREAKING DOWN 'Tax Return'
Typically, a tax return begins with
an identification section and is then divided into three main sections: income,
deductions and credits. The return itself is only a few pages long, but
depending on the type of income declared or the credits and deductions
requested, there can be several schedules that need to be added on.
Income
In
this part of the return, the person preparing it must indicate all forms of
income received during the year from all sources. Salaries, dividends,
royalties and, in many countries, capital gains must be reported.
Deductions
Taxpayers
will then be entitled to various deductions. These vary greatly from
jurisdiction to jurisdiction, but typical examples include contributions to
retirement savings plans, alimony paid and interest deductions on certain
loans. For businesses, all expenses incurred in order to conduct the business
is deductible.
At this point in the return, the
taxpayer will be able to determine his taxable income and tax payable.
Credits
The
next section of the return deals with any tax credits that the taxpayer may be
entitled to. Again, these vary greatly from jurisdiction to jurisdiction, but
there are often credits attributed for dependent children, old age pensions,
education and many more. The total credits are subtracted from the taxpayer's
tax payable.
The
end of the return is used to calculate if the taxpayer has an amount to pay or
is entitled to a refund. Most salaried employees have taxes withheld at source
on each pay, so they may be entitled to a refund if too much tax has been
withheld during the year. Similarly, corporations and individuals in business
may make quarterly advance payment to keep their tax balance running as close
to $0 as possible and avoid oversized tax bills at the end of the year.
How
to submit your income tax return
INCOME
tax return means submission of return of income in the prescribed form to the
Deputy Commissioner (DC) of Taxes by a person whose total income during the
income year exceeds the maximum amount of non-chargeable income or the income
of any other person in respect of which he is assessable to tax under the
Income Tax Ordinance (ITO), 1984.
However,
any non-resident Bangladeshi may file his return of income along with bank
draft equivalent to the tax liability to the nearest Bangladesh mission and the
mission will issue a receipt of such return with official seal and send the
return to the National Board of Revenue (NBR).
As
per the stipulation stated in the Finance Act, 2014 if any person earned more
than Tk 220,000 during the income year 2013-14 then s/he has to file his/her
income return along with the source(s) of income. Nevertheless, the limit of
maximum non taxable income will be Tk 275,000 for women and senior tax payers
of 65 years and above age, Tk 350,000 for physically challenged and retarded
personnel and Tk 400,000 for gazette enlisted war wounded freedom fighters.
However, the following person also has to submit his/her income tax return
though s/he did not earn much than the highest limit, if s/he:
i)
resides in city corporation or paurashava or divisional Head
Quarters (HQ) or district HQ and owns motor car including jeep/micro-bus or
holds membership of a club registered under the VAT law;
ii)
runs any business or profession having trade licence and
operates a bank account;
iii)
has registered with a recognised professional body as a
doctor, dentist, lawyer, income-tax practitioner, chartered accountant, cost
and management accountant, engineer, architect, surveyor or any other similar
profession;
iv)
member of a chamber of commerce and industries or a trade
association;
v)
is a candidate for an office of any paurashava, city
corporation, or a Member of Parliament;
vi)
assessed to tax for any of the three years immediately
preceding the income year;
vii)
participates in a tender floated by the Government, semi-
Government, autonomous body or a local authority. In addition, any registered
company/Non-Government Organization (NGO) shall file a return of its income or
the income of any other person for whom the company/NGO is assessable to the
authority.
The
tax rates during the assessment year 2014-15 for individual taxpayer other than
female, taxpayers of 65 years and above, differently able person, retarded
employee and gazetted war-wounded freedom fighter are as follows:
Total Income
Rate of Tax
For first Tk 220,000
0%
For next Tk 300,000
10%
For next Tk 400,000
15%
For next Tk 500,000
20%
For next Tk 3000,000 25%
For rest of the amount 30%
The
tax rates for female, taxpayers of 65 years and above, differently able,
retarded and gazetted war-wounded freedom fighter are same after exceeding the
maximum tax free threshold. However, the minimum amount of income tax for the
assessee who lives in city corporation area is Tk 3000, Tk 2000 for district HQ
inhabitants and Tk 1000 for other tax payers.
Submission
of income tax return
Each income tax payer is entitled to get income tax return form for free of
cost from tax offices or from the website of NBR i.e www.nbr-bd.org. In addition, NBR has
launched online tax calculator on www.nbrtaxcalculatorbd.org to
make it easy for the assessees to assess their taxes. Also, NBR introduces spot
assessment for small entrepreneurs, doctors and lawyers. Whoever invests Tk
1000,000 as initial capital shall pay Tk 4000 and those doctors and lawyers who
practiced their profession 5-10 years shall pay Tk 2000-4000 as income tax.
After assessing the amount of income tax every assessee shall deposit the
amount to the govt. exchequer through pay order, treasury challan or online via www.nbrepayment.gov.bd and submit
duly signed and verified return form along with the necessary documents to
relevant tax circle.
Time
limit to submit the return
A company/NGO shall submit the income tax return, by the fifteenth day of July
next following the income year or where the fifteenth day of July falls before
the expiry of six months from the end of the income year, before the expiry of
such six months and in all other cases, by the thirtieth day of September next
following the income year. However, the last date for the submission of return
may be extended by the DC of Taxes up to six months with the approval of the
Inspecting Joint Commissioner. Beside this, the Government can also extend the
time limit.
Punishment
for infringement of the rules
An assessee will be guilty of an offence punishable with imprisonment for a
term which may extend to three years but shall not be less than three months or
with fine or with both, if s/he makes a statement in any verification, return
or any other document furnished under any provisions of the ITO, 1984 which is
false or knowingly and willfully aids, abets, assists, incites or includes
another person to make or deliver a false return, account, statement,
certificate or declaration or himself knowingly and willfully makes or delivers
such false return, account, statement, certificate or declaration on behalf of
another person.
Furthermore,
an assessee will be culpable of an offence punishable with imprisonment for a
term which may extend to one year or with fine or with both, if s/he, without
reasonable cause fails to furnish the return of income in due time. Beside
this, the DC of Taxes will impose fine Tk 10% from the last assessed amount but
not less than Tk 1000 and also impose fine Tk 50 for each day late.
In
addition, a person will be guilty of an offence punishable with imprisonment
which may extend to five years but shall not be less than three months or with
fine or with both, if he conceals the particulars or deliberately furnishes
inaccurate particulars of his income. However, if a public servant or any
person assisting or engaged by any person discloses any particulars/information
in contravention of the provisions of this law is guilty of an offence
punishable with imprisonment for a term which may extend to six months or with
fine.
The
existing systems of accumulation of income tax are weak, complex, time
consuming and still not hassle free for the taxpayers. In this regard the whole
tax management system should be structured effectively to prevent evasion of
taxes.
