Where do deferred tax assets come from?

Deferred taxes - what is it?

Companies prepare a tax balance sheet and a commercial balance sheet for their annual consolidated financial statements. Both balance sheets result in a tax expense that can be different. To compensate for this difference, entrepreneurs can include deferred taxes on the trade balance sheet. The legal basis for deferred taxes is Paragraph 274 of the Commercial Code, HGB.

Why deferred taxes?

The tax balance shows the effective tax expense that actually has to be transferred to the tax office. The trade balance results in a profit for which a fictitious tax expense is calculated. In the best case, the fictitious and the effective tax expense are the same. If there is a difference, this is mostly due to the accounting regulations. These differ in both balance sheets and ensure that the same items are balanced in different amounts. The difference is offset with deferred taxes.

In accounting, a distinction is made between deferred tax assets and deferred tax liabilities.

Deferred tax assets

Active and passive taxes are "special items of their own" and must also be listed as such in the balance sheet. Deferred tax assets mean a future tax advantage for an entrepreneur. They come about when the trade balance shows fewer assets or higher liabilities than the tax balance sheet.

Example:

The Müller bakery ordered and paid for a new oven from a supplier in December. However, this should only be delivered after the annual accounts in March. Because the producer is struggling with a number of problems, the bakery is told that in the worst case it will have to pay additional costs of 25,000 euros. The bakery's bookkeeping includes a provision for potential losses in the bookkeeping. According to HGB, this must be listed in the trade balance sheet. According to the Income Tax Code, however, it may not appear in the tax balance sheet. There is thus a difference between the two balance sheets. The liabilities side of the commercial balance sheet is larger than the liabilities side of the tax balance sheet - there are deferred tax assets.

How are deferred tax assets calculated?

To calculate the deferred tax assets, the difference, in our case 25,000 euros, is taken as a basis and multiplied by the current tax rate.

Right to vote in the event of overhang

It is up to you whether you use deferred tax assets. There is an option that enables you to include deferred tax assets in your accounting. Deferred tax assets must be entered on the assets side of the balance sheet in accordance with Section 266 (2) D.

Deferred tax liabilities

These are deferred tax liabilities if the fictitious taxes from the commercial balance sheet exceed the effective taxes from the tax balance sheet. If this is the case, the commercial law profit is also higher than the tax law profit. Deferred tax liabilities arise when the assets in the commercial balance sheet are larger or the liabilities are smaller than those in the tax balance sheet. They have to be accounted for. Deferred tax liabilities must be entered on the liabilities side of the balance sheet in accordance with Section 266 (3) E.

The three differentiations

Anyone who deals with the determination of deferred taxes must also know what the differences are. Because the differences that exist between the balance sheets in the end do not have to be permanent. For example, it can be that they balance each other out again at some point.

Temporary differences

The current discrepancy between the two values ​​will even out in the foreseeable future. This is the case, for example, with property, plant and equipment, which may be listed 100 percent in the commercial balance sheet, but only appear as depreciation to a certain extent in the tax balance sheet. Example vehicle fleet: This costs a company 100,000 euros and is depreciated in equal parts over 10 years using the straight-line method. In the trade balance, 100,000 euros appear in expenses in the first year. In the tax balance sheet, 10,000 euros annually appear in depreciation for over ten years. After ten years, the two amounts will have balanced each other out.

Quasi-permanent differences

It is also clear here that the difference is balanced out again. However, it is not clear when this compensation will take place. This is the case, for example, with the special depreciation on a property. This only balances out when the property is sold. It is not yet clear when that will happen.

Permanent differences

These differences will no longer balance each other out. This can happen, for example, if items are included that are treated differently in the Income Tax Code and the Commercial Code. This is the case, for example, with supervisory board remuneration. 100 percent of these may be listed as operating expenses in the trade balance sheet. In the tax balance, however, they may only be accounted for 50 percent of the expenditure. The discrepancy will never even out.

Determine deferred taxes

Two different concepts can be used to determine deferred taxes. You use these concepts to decide whether there are deferred taxes or not.

The timing concept

This concept is based on the profit and loss account and only evaluates the data from this. To find out whether there are deferred taxes, only look at the income statement of the commercial balance sheet and the tax balance sheet. In this consideration, only temporary differences are taken into account. Since the income statement serves as the basis, you can only enter differences that affect income.

The Temporary Concept

This concept is based on the balance sheet. It not only records differences that affect success, but also those that have no effect on it. There is one condition, however: the differences must result in an expense or an income if they are resolved. With this concept temporary, quasi-permanent and permanent differences can be recorded.