Are Deferred Taxes Credit or Debit?

Taxpayers generally heed Benjamin Franklin’s advice that death and taxes are the only inevitable things in life. Businesses and individuals may defer tax payments by extending the deadline for the remittances, but sooner or later they need to settle their fiscal obligations. Corporate bookkeepers debit and credit deferred-tax specific accounts, depending on the transaction.

Deferred taxes result from temporary differences between the book value of a company’s assets and liabilities and their tax worth. They also may come from timing differences between the recognition of gains and losses in the organization’s financial statements and their corresponding values in tax filings. For example, tax deferrals may arise if a company adopts such accounting norms as generally accepted accounting principles (GAAP), and its GAAP asset and debt values are distinct from rules that the Internal Revenue Service has promulgated.

Credits and debits constitute the fundamental language bookkeepers use to record corporate transactions. A bookkeeper credits a liability account to increase its worth and debits the account to reduce its amount. A tax deferral can be a credit -- that is, a liability -- if the company’s fiscal income is lower than its accounting income. In essence, the business is paying fewer income taxes in the short term, but must brace for higher income taxes in the long term. This fiscal debt reminds corporate managers how much the firm actually owes the IRS.

Corporate bookkeepers debit an asset account to increase its value and credit the account to reduce its worth. A deferred tax asset arises when a company’s fiscal income is higher than its accounting income. In other words, the business is paying higher income taxes in the short term, but will benefit from lower fiscal obligations in the long term. Accountants indicate the temporary difference as an asset because the business will either pay lower taxes or receive a refund from the IRS.

In the corporate setting, various situations give rise to deferred tax assets and liabilities. These run the gamut from bad-debt accounting provisions, depreciation policies, financial reporting rules to record pension obligations, and operating loss carry-forward scenarios. Corporate accountants record tax deferrals in the respective sections of the balance sheet, whether they be assets or liabilities. They specify whether these items are short-term or long-term accounts, depending on the time frame during which the business intends to use them in its operating activities. A balance sheet is also known as a statement of financial position or statement of financial condition.