Hi, I am Nayo Carter Gray, the founder of First Step
Accounting and crunching numbers is my type of cardio.
I'm partnering with QuickBooks on this video series
to help answer questions by small business owners just like you.
So in today's video, we're going to cover a deferred tax assets and liabilities.
And hopefully by the end of the video, we will unpack all of things.
And you have a better understanding of what they actually are.
In another video, I talked about why balance sheets are so important
and every small business owner needs this in their financial statement package.
However, you may have noticed your accountant or tax professional
added a deferred tax asset or deferred tax liability to your balance sheet.
So what do they mean and why are they important?
But before we continue, make sure you hit that like button and subscribe
to the Quick Books Channel, especially if you find this video helpful.
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What are deffered tax assets and liabilities?
Well, they're financial items that appear on a company's balance sheet
when the income on
a tax return is different than the income or your accounting records.
So how does this happen?
Well, some transactions can have special or alternative tax treatment
that causes these deferred tax assets and liabilities.
Some items can include pensions, warranties, leases,
depreciable assets and the biggie net operating losses.
OK, what does this mean for your business?
So a deferred tax liability are tax debts you're going to owe in the future.
So to try to break this down and simplify it a little bit.
Think about the taxes you'll pay next year.
In reality, we know that those taxes are actually related to the year
we're currently in.
So we would book a deferred tax liability to record the expense and the correct
accounting period versus
having to wait until next year to see those expenses in our books.
Depreciation is another common expense that can have different tax
versus accounting treatment and cause a deferred tax liability.
A deffered tax asset is the complete opposite of a deferred tax liability,
as it typically results in a refund or a tax credit being received.
These generally arise when a business over pays or advanced
pays taxes or if they have a carry over loss from previous years.
Side note, a carryover loss is when a business
has a loss that it can't take in full and one tax year,
and that loss carries forward to future periods.
An example of a deferred tax asset would be the advance payment of rent.
You got the cash out the door.
You got a couple of months prepaid in advance,
and that expense does show up on your profit and loss statement.
However, it gets treated a little differently for tax purposes.
You don't actually get to take that deduction until the period
in which it occurs.
So therefore, it generates a deferred tax asset.
When considering deferred tax assets and liabilities understanding
the difference between financial reporting and tax reporting is vital.
The revenue and expenses reported on your financial statements
may not always translate to the income and deductions when your tax return.
Tax rules and financial rules are slightly different.
So you may see a difference in taxable income versus the net income
or your financial statements.
It can be tricky to determine
if and when you will take advantage of your deferred tax asset.
One thing to consider is tax rates.
In years when tax rates are high the savings from your deferred
tax asset will be greater versus years when the tax rates are low.
As a small business owner, understanding how deferred
tax assets and liabilities work can get pretty confusing.
So if you want more help understanding specifically how these things work.
Please, please, please talk to your trusted accountant or tax professional.
That, in conjunction with reliable accounting software, will allow you
to follow the proper accounting standards as well as maximize your tax benefits.
Whoa. That was a lot to cover all at once.
But if you like this information and found it helpful.
Be sure to like this video as well as subscribe to the Quick Books
channel so you can find more video content just like this.