Question

The Yellow Corporation reports a deferred income tax liability of $732,000 in its December 31, Year One, balance sheet. a. Why are differences created between a company’s reported net income and the taxable income figure shown on its income tax return? b. What is meant by the term “temporary tax difference”? c. In general, what is the meaning of a deferred income tax liability? d. In analyzing a company, liabilities are generally viewed as a negative. Why do company officials attempt to create deferred income tax liabilities?

Answer 1

a) As GAAP (Generally Accepted Accounting Principles) guides financial accounting and where tax treatments are guided by the IRS (Internal Revenue Service) by providing certain specific tax codes, the differences are created between a company's reported net income and the taxable income figure shown on its income tax return.

b) The tax liability between the accounting reports and tax reports basically shown differences, but they gradually come to the same reversal value occurred at the 1^st year by covering the value at say 4^th or 5^th year (the difference ended up in the 1^st year). So the difference between year 1-5 is nothing but the temporary tax difference.

c)A liability which arises due to the differences between the originally occurred tax payment and the taxes concluded to be paid according to the financial statements of accounting is called deferred tax liability.

d) Because that is the wise business strategy where the company can use its cash for a longer period of time and hence generate additional revenues.