DTA or DTL? How Do You Stop Getting Deferred Taxes Backward?

Temporary vs permanent differences

A temporary difference reverses in a future period and can create deferred tax assets or liabilities. A permanent difference never reverses and does not create a deferred tax balance.

Deferred tax asset

A DTA represents a future tax benefit. A classic example is a book expense recognized before the related tax deduction, such as certain accrued warranty costs. The deduction comes later, creating a potential future tax benefit.

Deferred tax liability

A DTL represents future taxable amounts. Accelerated tax depreciation can reduce taxable income earlier than book income, creating a future reversal that generally results in a DTL.

The balance-sheet approach

For an asset, book basis greater than tax basis generally creates a taxable temporary difference and DTL. Tax basis greater than book basis generally creates a deductible temporary difference and DTA. For liabilities, reason through the future deduction or taxable effect rather than blindly copying the asset rule.

Use enacted tax rates

Deferred tax balances use enacted rates expected to apply when the temporary difference reverses, based on the facts provided. A proposed rate is not the same as an enacted rate.

Valuation allowance

A gross DTA may be reduced by a valuation allowance when realization is not sufficiently supported under the applicable accounting framework. Keep gross DTA, valuation allowance, and net DTA separate.

The takeaway

DTA means future tax benefit. DTL means future taxable consequence.

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