Depreciation Timing
Depreciation timing differences are often the largest contributor to the magnitude of deferred tax liabilities. Because most companies take advan- tage of the accelerated depreciation schedules, deferred tax liabilities appear in the long-term liabilities section of corporate balance sheets. However, another expense related to health care benefits upon retirement give rise to a deferred income tax benefit (an asset). Companies that provide for employee healthcare coverage upon retirement must recognize an expense and a related liability (if not funded) with the passage of time. The IRS does not allow the recognition of this expense until the distribution of benefits takes place. When companies accrue for this expense, they create future deductible amounts for tax purposes. Ultimately these expenses will lower taxable income and reduce future income tax obligation. Future deductible amounts are reported as deferred tax assets.
Common examples of temporary (timing) differences include:
■ Depreciation. Generally results in a deferred tax liability ■ Bad debt expense. Generally results in a deferred tax asset ■ Prepaid or deferred expenses. Generally results in a deferred tax liability ■ Unearned revenues. Generally results in a deferred tax asset ■ Accrued warranty liabilities. Generally results in a deferred tax asset ■ Other post-retirement benefit expenses. Generally results in a
deferred tax asset
