Crash Course in Accounting and Financial Statement Analysis, Second Edition

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.

Exhibit 6.17. The Differences Between GAAP Taxes and IRS Taxes that Create Deferred Tax Assets and Liabilities are Temporary and are Expected to Reverse Themselves

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 ...