Lots of exciting and helpful new videos coming up! Be sure to click the like button, subscribe and turn on notifications to ensure you don't miss anything. Watch my follow-up video on deferred tax liabilities next: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Excellent example for deferred tax asset.Many day I was expended but I did not understand deferred tax asset.This video is very useful for deferred tax asset.
Thank you very much! It took me a long time to understand it as well. Once I did, I decided to summarize what I learned in this video. Please watch the sequel "deferred tax liabilities versus deferred tax assets" as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Great to hear that, Isaac! Yes, I love making videos this way. Recently, I started adding small sections at the start where I am in full view in person. I am using the Windows Photos app to put all the pieces together. See this example: th-cam.com/video/CXiKLtb7tqI/w-d-xo.html
Great to hear that! Happy to help. I followed up with two more videos related to deferred tax liabilities, maybe these can be useful too: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Hello Brendan! Thanks for the compliment. Hope you score a straight A now. :-) I made a related video on deferred tax liabilities that might be interesting for you as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Nice to hear that! For the journal entries related to this, as well as discussion of deferred tax liabilities, have a look at these related videos: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html&pp=gAQBiAQB
Thank you for watching, Rose! The companion video on Deferred Tax Liabilities might have some more useful information for you: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Wow, thanks! Please share with your fellow students, and have a look at the related video on deferred tax liabilities as well: th-cam.com/video/wom7IBNnXM8/w-d-xo.html&pp=gAQBiAQB
Debit Income Tax Expense (I/S) - Credit Deferred Tax Assets (B/S) For general explanation of deferred tax journal entries, see this video th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
You're welcome, Refiloe! Happy to help. Check out the deferred tax liabilities vs deferred tax assets video as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Happy to help! Now that you understand DTA, have a look at its counterpart, deferred tax liabilities, as well: th-cam.com/video/wom7IBNnXM8/w-d-xo.html&pp=gAQBiAQB
Thank you! The follow-up video on deferred tax assets versus deferred tax liabilities might also be helpful for you to watch: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
You're welcome, Brandon! Great to hear that. I think you will enjoy the related video on deferred tax assets vs deferred tax liabilities as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
At 1:07 you debited "Income Tax Expense (I/S)" and credited "Income Tax Payable (B/S)". If you do this your balance sheet will not balance. In order to balance the B/S: are you also debiting "Retained Earnings" because at the end of the year your "Net Income" from your I/S will transfer over to retained earnings? I really like your video and graphics btw.
Thank you for the compliment! Regarding your question of the balance sheet not balancing (during the year): that is correct, and inherent in the way the accounting system works. A company might have a lot of such entries where income statement and balance sheet are affected in the same entry. Debit "Income Tax Expense (I/S)" and credit "Income Tax Payable (B/S)" is one of them, another example (out of many) is what happens in a sales transactions for goods debit "Accounts Receivable (B/S)" and credit "Revenue (I/S)", followed by debit "Cost of Goods Sold (I/S)" and credit "Inventory (B/S)". Or the invoice for the annual company employee event debit "Travel and Entertainment expense (I/S)" credit "Accounts Payable (B/S)". At the end of the accounting period, you roll over the result of your income statement into the balance sheet in Retained Earnings. I would not call that a journal entry, it is an automated process as part of the closing cycle. Hope this helps!
That clarifies it! Thanks for the thorough response! I hope you do not mind another question. If I sell a service for cash and make the following journal entries: DR Cash $100 and CR Revenue $100. Since I added $100 to my I/S the money flows down the I/S and gets taxed (30% for example) and now the original $100 is now $70. I understand the $70 gets put into Retained Earnings when closing out the I/S at year end. There is a $30 difference . How do you fix that difference? Thanks again!
You're welcome. I think you are taking too many steps at one time. Go slow, and record each transaction/event. After your journal entry of selling the service for cash, you should book the taxation journal entry debit Income Tax Expense (I/S) 30 and credit Income Tax Payable (B/S) 30, followed by settlement of the taxes with the tax authorities debit Income Tax Payable (B/S) 30 credit Cash 30. Once you do your year end financial statement preparation, you now have a Net Income in the income statement of 70 (assuming no cost of services sold), and on the balance sheet 70 in Cash in assets on the left hand side, and 70 in Equity (more specifically: Retained Earnings subaccount) on the right hand side. Maybe my video on Retained Earnings could also be of use to you: th-cam.com/video/xiwQh5E7JWQ/w-d-xo.html
So the reason General Motors, for example, found it less profitable to continue taking deferred tax assists was because, when the tax bill lowered the corporate tax rate from 35 to 21%, the amount they owed was lowered from a 35% rate to a 21% rate? I just want to make sure I'm understanding this. Are deferred tax assets then paid back at a later time? And, if so, when are they paid back? Does the corporation decide when to pay it back?
Hello Daniel! Please watch my follow-up video on "Deferred Tax Liabilities vs Deferred Tax Assets" to get the full picture: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html It has some examples of companies. In my view, it's not really about "choosing" whether or not to use deferred tax assets. It's merely the outcome of a calculation. The main concept for tax deferrals: the profit that you recognize for “book” or financial accounting purposes, is not the same as the profit you recognize for “tax” purposes. You record deferred tax assets and liabilities on the balance sheet for temporary (timing) differences between “tax” and “book” accounting. If you have a deferred tax asset, you have (in a way) a receivable from the government (subject to certain conditions of being able to claim it). If you have a deferred tax asset, you have the opposite: you owe the government money once certain income becomes taxable (yet you have already put an amount aside for it on the balance sheet).
Great content, I would like to interview you on your taxation subject matter. I am new to this TH-cam world but my aim is to provide quality content with sources and professionals in the accounting.
Hello Shameem, thank you for the kind words! I have a very full production schedule right now, let's talk later this year once you have grown your channel a bit.
So in the example that you provided StartUp Inc would not have payed any taxes for the first 2 years? (Since the first year it had a loss and therefore didn't pay any tax, and then it carried this loss into the second year, so when it made it 100k EBT it simply credited the DTA balance and didn't actually pay any tax?)
Have a look at the related video on deferred tax liabilities as well, those are most often related to government incentives for accelerated depreciation on fixed asset investments: th-cam.com/video/wom7IBNnXM8/w-d-xo.html
Happy to help, Edilson! Have a look at my two playlists regarding accounting, hope you will find some more useful videos there: Accounting 101 th-cam.com/video/b93KBmcXanI/w-d-xo.html Intermediate accounting th-cam.com/video/lBvnSgIGVnU/w-d-xo.html
great video but i am confused i need help.i am looking at a company called bfi (burgerfi) and in their last 10k they have deferred income taxes as a current asset but is this not a liability?
Hi! I have not heard of that company before. Deferred income taxes can be an asset, or a liability. I would prefer it if all companies would use more specific terminology such as deferred tax assets and deferred tax liabilities, as this provides more clarity to the reader about which side of the balance sheet we are looking at. See also: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Thank you very much!!! I have a series on accruals and deferrals, maybe there are more helpful videos for you in there: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
If Earnings Before Tax is a loss of $100K, then this results in a tax credit (tax refund to be received) of $35K, therefore Net Income is a loss of $65K. Mathematically, you should read that tax charge line in the calculation as - - $35K, where - - is the same as +.
Hi Thank you for this , I’m from an engineering back ground and have just started reading about finance. Excuse the basic question but can you please explain to me what you mean by debit the 35,000 to the Income statement and credit the 35,000 to Balance sheet. The question is about the credit and debit Thank you
Hello Tarek! Welcome! That is an excellent question. My video "debits and credits explained" (part of a playlist with important basic accounting concepts) should help you get started on that side: th-cam.com/video/n-lCd3TZA8M/w-d-xo.html Enjoy, and let me know what you think!
Hello Tarek! Join me for the next Finance Storyteller webinar focused on how to analyze quarterly earnings results in times of economic turbulence, reviewing Uber Technologies Inc 2020Q1 performance. Analyzing revenue, profitability, cash flow, and liquidity. This Sunday May 10th at 9:30 PM India Standard Time / 6 PM European time / Noon US Eastern time / 9 AM US Western time! th-cam.com/video/87Ag_hhseOA/w-d-xo.html
Is it possible to get corporation tax refunds if a company has made a loss against the amount of tax owed for 1 year, If they've paid tax in the past? Does it depend on how much tax they've paid in the past/how many years they've been paying?
Hi Patrick! Yes, it might be possible to get those refunds. Take a look at the topic net operating loss (NOL) carryback and carryforward. Those rules differ from country to country, and even within a country tend to get changed over time.
You don't pay income tax on a loss. Making a loss leads to a negative tax expense, and a right to claim that amount back from the tax authorities in the future once the company does make a profit.
Thank you for this video! If say you had a net loss in a year but still had a timing difference for warranty, do you still need to record a tax asset? If yes, will the tax asset get reversed if you are able to carryforward the loss? Thank you!
Yes, I would think so, but it depends on the "direction" of the timing difference for warranty. Does that specific timing difference create a deferred tax asset, or a deferred tax liability? More information on journal entries for deferred taxes here: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Hello, In case the DEFFERED TAX ASSETS decreases due to a reduction of taxes by the state. This reduction (loss of the asset) where it is recorded in the RESULTS account or in equity? If it is in the income statement, would it be recorded in the taxes to be paid? Thank you,
Hello Alex! From what I have seen reviewing annual reports of US companies for 2017 and 2018, the effect of the tax rate % change from 35% to 21% on the deferred tax assets and liabilities, is recorded in income tax expense in the Profit & Loss statement. In other words: in results.
1st question: no. 2nd question: yes. Have a look at the journal entries in this related video: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html&pp=gAQBiAQB When you prepare financial statements for “book” (US GAAP / IFRS) purposes: “Book” profit is the primary perspective, you make the “tax reality” fit in You match tax expense in the income statement to “book” profit before tax Record deferred tax assets and liabilities on the balance sheet for temporary (timing) differences between “tax” and “book” accounting
@@TheFinanceStoryteller Thank you! Sorry but I don't understand why 1st question is no. If we have a warranty expense, or do our prepaid taxes today, that reduces operating income today (on the books), wouldn't that therefore decrease book's net income too? Because we are reducing our book profit in order to get that "credit" or "raincheck" (i.e., the DTA) to then use indefinitely in the future for a bad quarter/year?
I think you are missing the point on what a DTA is. It is not at all like an ordinary accrual or prepayment. A DTA covers the difference in treatment between your regular GAAP accounting books and the tax set of books. Those are two different "realities", two different datasets. Both of these sets of books have a line called "income tax expense", and those are likely to be different numbers. You don't intentionally create a DTA, it is the result of how GAAP works vs the tax books. In the GAAP books of the startup company in the video, when the company makes a loss, it records negative tax expense. That doesn't work the same way in the tax set of books. According to the tax rules in most countries, you don't immediately get a refund (in cash) if you've never made a profit before in the past. Therefore, in your GAAP books, rather than booking a tax receivable (which would be claimable in the short term, a current asset), you record a DTA (most likely in non-current assets), and have to monitor that DTA carefully as it might expire before you can use it to offset future profits against historical losses. If you have a good year (making a profit), you want to use the DTA to preserve cash. Maybe it is easier to study deferred tax liabilities first. These are often driven by favorable tax treatment on CapEx investments (government incentives to invest), which allow companies to depreciate faster in their tax books than they would do in their GAAP books. In that video, I included a table on how the DTL is built up over the years, and then subsequently going down. Once you get how DTLs work, DTAs are easy (as they are the opposite). th-cam.com/video/wom7IBNnXM8/w-d-xo.html&pp=gAQBiAQB Hope this helps!
Hi Arman! The company is making a pre-tax loss of $100K, for which they hope to get a tax rebate of $35K, so the net income is ($65K). They have a negative tax expense in the income statement, and create a deferred tax asset on the balance sheet.
Happy to help! I have more on deferred taxes in general, and a specific video on deferred tax liabilities, in this playlist: th-cam.com/video/wom7IBNnXM8/w-d-xo.html
Thank you, Jacqueline! :-) Please check out the companion video covering both deferred tax assets and liabilities as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Not quite. The deferred tax asset is created when the business has a net operating loss, which means it does not pay taxes nor can it reclaim taxes (yet) in that period. This can be used as an offset to future taxes on income. So if the tax rate changes, the "value" of the historical operating loss changes, and the deferred tax asset reduces in value.
@@TheFinanceStoryteller yeah i got that part but my point is that the goverment will lower the value of the deferred tax assets if the taxation rate goes down(companies that operated with a loss) but the other companies that operated with a profit wont get a tax refund for the taxes they paid when the rates were up.I hope it makes sense . Great video btw!
"Deferred tax assets reduce taxes paid in future periods" In cases where a deferred tax asset is created in a year because of timing differences we have a debit balance on the deferred asset account, which will be used to "reduce taxes in future periods" Assume we arrive at the future period-If tax on the income statement is a debit balance how can it be reduced by a deferred tax asset balance which is also a debit balance? My mind is spinning-it seems I have a fundamental misunderstanding
Okay I think I've figured it out. This might be a clumsy interpretation. In the future period the tax expense in the income statement (based on accounting books) is split on the credit side between tax payable and deferred tax asset so the tax liability does not take the full hit. You are in effect "reducing" the tax liability and hence "reducing taxes paid in future periods" You are not reducing the tax as calculated by the tax authorities but reducing the "accounting" tax payable. Is this correct? Thank you for your instructional videos.
Well done! I like your interpretation. I agree that this stuff does make your head spin, and your brain hurt. I need to see it in front of me in T-accounts to grasp it myself. Maybe the follow-up videos on deferred tax assets vs deferred tax liabilities th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html , and a deeper dive on deferred tax liabilities th-cam.com/video/wom7IBNnXM8/w-d-xo.html can help a bit more.
Thank you for the feedback. In the settings of a TH-cam video (bottom right corner), you can speed up or slow down the playback speed. Switching on the subtitles might also help easier understanding.
Start up 1st year , earning before tax is negative 100,000 less income tax 35,000 the earning after tax should be negative 135,000. Please check and clarify
It's correct as shown in the video. If a pre-tax profit is made of $100K, then income tax expense on that is $35K, and net income after tax $65K. If a pre-tax loss of $100K, then income tax "refund" of $35K, and net loss shrinks to $65K. The whole point of deferred tax assets is that the refund is not claimable in cash from the tax authorities immediately, if the company never made a profit before. Or in other words, more mathematically, - - (the minus of a minus) is a plus. Hope this helps!
Lots of exciting and helpful new videos coming up! Be sure to click the like button, subscribe and turn on notifications to ensure you don't miss anything. Watch my follow-up video on deferred tax liabilities next: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
What you explain in 4 minutes took our professor a week. Nice job and thank you\\
Glad it helped! Have you watched the related video on deferred tax liabilities as well: th-cam.com/video/wom7IBNnXM8/w-d-xo.html&pp=gAQBiAQB
I find it easy to understand DTL, but not DTA, thanks for help, a clearer picture now, blessing from Hong Kong !
Great to hear that! Greetings back from the Netherlands. Have a great weekend.
*Wow! Clearly a nice and amusing video on DTA.* _Tysm._
This video is a gem. Thank you finance storyteller, you made this accounting concept so much clearer for me.
You're very welcome! :-)
Excellent example for deferred tax asset.Many day I was expended but I did not understand deferred tax asset.This video is very useful for deferred tax asset.
Thank you very much! It took me a long time to understand it as well. Once I did, I decided to summarize what I learned in this video. Please watch the sequel "deferred tax liabilities versus deferred tax assets" as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Precise explanation. Its just perfect.
Wow! Thank you very much, Janki Naval! Please spread the word. ;-)
The tutorial for how to make a ide show video is the perfect one ihave searched for for a while. Thank you!
Great to hear that, Isaac! Yes, I love making videos this way. Recently, I started adding small sections at the start where I am in full view in person. I am using the Windows Photos app to put all the pieces together. See this example: th-cam.com/video/CXiKLtb7tqI/w-d-xo.html
@@TheFinanceStoryteller will do
Thank you so much. Your video much better than my professor's presentation.
Happy to help! Please spread the word to your fellow students. :-)
Helpful for something that came up today at work. thanks.
Great to hear that! Happy to help. I followed up with two more videos related to deferred tax liabilities, maybe these can be useful too: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
I wish my professor would’ve explained it as clearly as this
Hello Brendan! Thanks for the compliment. Hope you score a straight A now. :-) I made a related video on deferred tax liabilities that might be interesting for you as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
A lot of help from your video,thanks for sharing
Nice to hear that! For the journal entries related to this, as well as discussion of deferred tax liabilities, have a look at these related videos: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html&pp=gAQBiAQB
Thank you for simple explanation.
Glad it was helpful! I have a video on its counterpart as well: deferred tax liabilities th-cam.com/video/wom7IBNnXM8/w-d-xo.html
Thank you a lot that was simple and smooth
You're welcome! Please take a look at the sequel on deferred tax liabilities as well: th-cam.com/video/wom7IBNnXM8/w-d-xo.html
This is fairly helpful! Thank you sir!
Thank you for watching, Rose! The companion video on Deferred Tax Liabilities might have some more useful information for you: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Better explanation than my tuition lecturer😆..Keep up the brilliant work.
Wow, thanks! Please share with your fellow students, and have a look at the related video on deferred tax liabilities as well: th-cam.com/video/wom7IBNnXM8/w-d-xo.html&pp=gAQBiAQB
Thankyou for making understanding what deffered tax asset is
Happy to help! Thank you for watching and commenting. Next up: what is a deferred tax liability: th-cam.com/video/wom7IBNnXM8/w-d-xo.html
So where did the $14,000 go? Is there supposed to be an adjusting JE here?
Debit Income Tax Expense (I/S) - Credit Deferred Tax Assets (B/S) For general explanation of deferred tax journal entries, see this video th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Thank you, well explained.
You're welcome, Refiloe! Happy to help. Check out the deferred tax liabilities vs deferred tax assets video as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Very well explained, thank you very much!
Glad it was helpful, Lukas! I did a follow-up video on deferred tax liabilities as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
This is very helpful! Thank you so much! 👍👍👍
You're very welcome, Chinmee! Here's the link to the related video on deferred tax liabilities: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
i have read a book on deferred tax assets. never understood what it is. until i watch this video.
Happy to help! Now that you understand DTA, have a look at its counterpart, deferred tax liabilities, as well: th-cam.com/video/wom7IBNnXM8/w-d-xo.html&pp=gAQBiAQB
excellent explanation
Thank you! The follow-up video on deferred tax assets versus deferred tax liabilities might also be helpful for you to watch: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Mind blown. Awesome.
Thank you, Sean!!! I have a related video on deferred tax liabilities as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Very clear Sir
Thank you! Happy to hear that. Thank you for watching and commenting.
Thanks for the amazing video!!!!!
You're welcome, Brandon! Great to hear that. I think you will enjoy the related video on deferred tax assets vs deferred tax liabilities as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
At 1:07 you debited "Income Tax Expense (I/S)" and credited "Income Tax Payable (B/S)". If you do this your balance sheet will not balance. In order to balance the B/S: are you also debiting "Retained Earnings" because at the end of the year your "Net Income" from your I/S will transfer over to retained earnings? I really like your video and graphics btw.
Thank you for the compliment! Regarding your question of the balance sheet not balancing (during the year): that is correct, and inherent in the way the accounting system works. A company might have a lot of such entries where income statement and balance sheet are affected in the same entry. Debit "Income Tax Expense (I/S)" and credit "Income Tax Payable (B/S)" is one of them, another example (out of many) is what happens in a sales transactions for goods debit "Accounts Receivable (B/S)" and credit "Revenue (I/S)", followed by debit "Cost of Goods Sold (I/S)" and credit "Inventory (B/S)". Or the invoice for the annual company employee event debit "Travel and Entertainment expense (I/S)" credit "Accounts Payable (B/S)". At the end of the accounting period, you roll over the result of your income statement into the balance sheet in Retained Earnings. I would not call that a journal entry, it is an automated process as part of the closing cycle. Hope this helps!
That clarifies it! Thanks for the thorough response! I hope you do not mind another question. If I sell a service for cash and make the following journal entries: DR Cash $100 and CR Revenue $100. Since I added $100 to my I/S the money flows down the I/S and gets taxed (30% for example) and now the original $100 is now $70. I understand the $70 gets put into Retained Earnings when closing out the I/S at year end. There is a $30 difference . How do you fix that difference? Thanks again!
You're welcome. I think you are taking too many steps at one time. Go slow, and record each transaction/event. After your journal entry of selling the service for cash, you should book the taxation journal entry debit Income Tax Expense (I/S) 30 and credit Income Tax Payable (B/S) 30, followed by settlement of the taxes with the tax authorities debit Income Tax Payable (B/S) 30 credit Cash 30. Once you do your year end financial statement preparation, you now have a Net Income in the income statement of 70 (assuming no cost of services sold), and on the balance sheet 70 in Cash in assets on the left hand side, and 70 in Equity (more specifically: Retained Earnings subaccount) on the right hand side. Maybe my video on Retained Earnings could also be of use to you: th-cam.com/video/xiwQh5E7JWQ/w-d-xo.html
Now I see how this all ties together. This has been bugging me for months. Glad you are posting these helpful videos.
Excellent
Thank you so much, Edrees! 😀 Please subscribe!
So the reason General Motors, for example, found it less profitable to continue taking deferred tax assists was because, when the tax bill lowered the corporate tax rate from 35 to 21%, the amount they owed was lowered from a 35% rate to a 21% rate? I just want to make sure I'm understanding this.
Are deferred tax assets then paid back at a later time? And, if so, when are they paid back? Does the corporation decide when to pay it back?
Hello Daniel! Please watch my follow-up video on "Deferred Tax Liabilities vs Deferred Tax Assets" to get the full picture: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html It has some examples of companies. In my view, it's not really about "choosing" whether or not to use deferred tax assets. It's merely the outcome of a calculation. The main concept for tax deferrals: the profit that you recognize for “book” or financial accounting purposes, is not the same as the profit you recognize for “tax” purposes. You record deferred tax assets and liabilities on the balance sheet for temporary (timing) differences between “tax” and “book” accounting. If you have a deferred tax asset, you have (in a way) a receivable from the government (subject to certain conditions of being able to claim it). If you have a deferred tax asset, you have the opposite: you owe the government money once certain income becomes taxable (yet you have already put an amount aside for it on the balance sheet).
well explained. thank you
You're welcome, Judith! :-) Thank you for watching and commenting.
Thank you for sharing
You're welcome! Thank you for watching. :-)
Great content, I would like to interview you on your taxation subject matter. I am new to this TH-cam world but my aim is to provide quality content with sources and professionals in the accounting.
Hello Shameem, thank you for the kind words! I have a very full production schedule right now, let's talk later this year once you have grown your channel a bit.
Thank you!
You're welcome!
So in the example that you provided StartUp Inc would not have payed any taxes for the first 2 years? (Since the first year it had a loss and therefore didn't pay any tax, and then it carried this loss into the second year, so when it made it 100k EBT it simply credited the DTA balance and didn't actually pay any tax?)
Correct! DTAs allow you (in this case) to look at the taxable profit on a cumulative history-to-date basis.
@@TheFinanceStoryteller Cool, thanks for confirming 👍
Have a look at the related video on deferred tax liabilities as well, those are most often related to government incentives for accelerated depreciation on fixed asset investments: th-cam.com/video/wom7IBNnXM8/w-d-xo.html
Thank you @the finance storyteller for the video. i wonder if you give accounting courses or exercises from the basics
Happy to help, Edilson! Have a look at my two playlists regarding accounting, hope you will find some more useful videos there:
Accounting 101 th-cam.com/video/b93KBmcXanI/w-d-xo.html
Intermediate accounting th-cam.com/video/lBvnSgIGVnU/w-d-xo.html
great video but i am confused i need help.i am looking at a company called bfi (burgerfi) and in their last 10k they have deferred income taxes as a current asset but is this not a liability?
Hi! I have not heard of that company before. Deferred income taxes can be an asset, or a liability. I would prefer it if all companies would use more specific terminology such as deferred tax assets and deferred tax liabilities, as this provides more clarity to the reader about which side of the balance sheet we are looking at. See also: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Thanks a lot .
You're welcome, Mohamed!
Amazing.
Thank you!
Excellent 👍
Thank you!!!
Good to know for #start-ups. thx
You're amazing ❤️
Thank you very much!!! I have a series on accruals and deferrals, maybe there are more helpful videos for you in there: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Thank u😘
You're welcome! :-)
How -100,000 and tax - 35,000 become -65,000?
Isn't it -135,000. Please anyone explain
If Earnings Before Tax is a loss of $100K, then this results in a tax credit (tax refund to be received) of $35K, therefore Net Income is a loss of $65K. Mathematically, you should read that tax charge line in the calculation as - - $35K, where - - is the same as +.
Hi Thank you for this ,
I’m from an engineering back ground and have just started reading about finance.
Excuse the basic question but can you please explain to me what you mean by debit the 35,000 to the Income statement and credit the 35,000 to Balance sheet. The question is about the credit and debit
Thank you
Hello Tarek! Welcome! That is an excellent question. My video "debits and credits explained" (part of a playlist with important basic accounting concepts) should help you get started on that side: th-cam.com/video/n-lCd3TZA8M/w-d-xo.html Enjoy, and let me know what you think!
Hello Tarek! Join me for the next Finance Storyteller webinar focused on how to analyze quarterly earnings results in times of economic turbulence, reviewing Uber Technologies Inc 2020Q1 performance. Analyzing revenue, profitability, cash flow, and liquidity. This Sunday May 10th at 9:30 PM India Standard Time / 6 PM European time / Noon US Eastern time / 9 AM US Western time! th-cam.com/video/87Ag_hhseOA/w-d-xo.html
Is it possible to get corporation tax refunds if a company has made a loss against the amount of tax owed for 1 year, If they've paid tax in the past? Does it depend on how much tax they've paid in the past/how many years they've been paying?
Hi Patrick! Yes, it might be possible to get those refunds. Take a look at the topic net operating loss (NOL) carryback and carryforward. Those rules differ from country to country, and even within a country tend to get changed over time.
Thank u
You're welcome, Ujjwol!
How come we pay income tax on loss in the case of start up inc
You don't pay income tax on a loss. Making a loss leads to a negative tax expense, and a right to claim that amount back from the tax authorities in the future once the company does make a profit.
Thank you for this video! If say you had a net loss in a year but still had a timing difference for warranty, do you still need to record a tax asset? If yes, will the tax asset get reversed if you are able to carryforward the loss? Thank you!
Yes, I would think so, but it depends on the "direction" of the timing difference for warranty. Does that specific timing difference create a deferred tax asset, or a deferred tax liability? More information on journal entries for deferred taxes here: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
Hello,
In case the DEFFERED TAX ASSETS decreases due to a reduction of taxes by the state.
This reduction (loss of the asset) where it is recorded in the RESULTS account or in equity?
If it is in the income statement, would it be recorded in the taxes to be paid?
Thank you,
Hello Alex! From what I have seen reviewing annual reports of US companies for 2017 and 2018, the effect of the tax rate % change from 35% to 21% on the deferred tax assets and liabilities, is recorded in income tax expense in the Profit & Loss statement. In other words: in results.
Thanks,
Hi sir, expense deffered tax expense if there is both deffered tax asset and liability as bd and cd?
Hello Khairul. Thank you for your question. Can you rephrase it? I currently have no idea what you are asking for.
So DTAs decrease net income temporarily ? But increase cash flow in the next period because they don't have to pay higher tax amount?
1st question: no. 2nd question: yes. Have a look at the journal entries in this related video: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html&pp=gAQBiAQB
When you prepare financial statements for “book” (US GAAP / IFRS) purposes:
“Book” profit is the primary perspective, you make the “tax reality” fit in
You match tax expense in the income statement to “book” profit before tax
Record deferred tax assets and liabilities on the balance sheet for temporary (timing) differences between “tax” and “book” accounting
@@TheFinanceStoryteller
Thank you!
Sorry but I don't understand why 1st question is no. If we have a warranty expense, or do our prepaid taxes today, that reduces operating income today (on the books), wouldn't that therefore decrease book's net income too? Because we are reducing our book profit in order to get that "credit" or "raincheck" (i.e., the DTA) to then use indefinitely in the future for a bad quarter/year?
I think you are missing the point on what a DTA is. It is not at all like an ordinary accrual or prepayment. A DTA covers the difference in treatment between your regular GAAP accounting books and the tax set of books. Those are two different "realities", two different datasets. Both of these sets of books have a line called "income tax expense", and those are likely to be different numbers. You don't intentionally create a DTA, it is the result of how GAAP works vs the tax books. In the GAAP books of the startup company in the video, when the company makes a loss, it records negative tax expense. That doesn't work the same way in the tax set of books. According to the tax rules in most countries, you don't immediately get a refund (in cash) if you've never made a profit before in the past. Therefore, in your GAAP books, rather than booking a tax receivable (which would be claimable in the short term, a current asset), you record a DTA (most likely in non-current assets), and have to monitor that DTA carefully as it might expire before you can use it to offset future profits against historical losses. If you have a good year (making a profit), you want to use the DTA to preserve cash.
Maybe it is easier to study deferred tax liabilities first. These are often driven by favorable tax treatment on CapEx investments (government incentives to invest), which allow companies to depreciate faster in their tax books than they would do in their GAAP books. In that video, I included a table on how the DTL is built up over the years, and then subsequently going down. Once you get how DTLs work, DTAs are easy (as they are the opposite). th-cam.com/video/wom7IBNnXM8/w-d-xo.html&pp=gAQBiAQB
Hope this helps!
@@TheFinanceStoryteller
Ok, I see. Thank you very much!
@@BM_100 Happy to help!
Why net income is -$65k in Startup Inc's first year, why not -$135k?
Hi Arman! The company is making a pre-tax loss of $100K, for which they hope to get a tax rebate of $35K, so the net income is ($65K). They have a negative tax expense in the income statement, and create a deferred tax asset on the balance sheet.
Explained half of my lecture slide in 5 min.
Happy to help! I have more on deferred taxes in general, and a specific video on deferred tax liabilities, in this playlist: th-cam.com/video/wom7IBNnXM8/w-d-xo.html
nice
Thank you, Jacqueline! :-) Please check out the companion video covering both deferred tax assets and liabilities as well: th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html
so went rates go down they reduce your deferred tax assets but wont return money for the taxes paid at 35% .
Not quite. The deferred tax asset is created when the business has a net operating loss, which means it does not pay taxes nor can it reclaim taxes (yet) in that period. This can be used as an offset to future taxes on income. So if the tax rate changes, the "value" of the historical operating loss changes, and the deferred tax asset reduces in value.
@@TheFinanceStoryteller yeah i got that part but my point is that the goverment will lower the value of the deferred tax assets if the taxation rate goes down(companies that operated with a loss) but the other companies that operated with a profit wont get a tax refund for the taxes they paid when the rates were up.I hope it makes sense . Great video btw!
"Deferred tax assets reduce taxes paid in future periods" In cases where a deferred tax asset is created in a year because of timing differences we have a debit balance on the deferred asset account, which will be used to "reduce taxes in future periods" Assume we arrive at the future period-If tax on the income statement is a debit balance how can it be reduced by a deferred tax asset balance which is also a debit balance? My mind is spinning-it seems I have a fundamental misunderstanding
Okay I think I've figured it out. This might be a clumsy interpretation. In the future period the tax expense in the income statement (based on accounting books) is split on the credit side between tax payable and deferred tax asset so the tax liability does not take the full hit. You are in effect "reducing" the tax liability and hence "reducing taxes paid in future periods" You are not reducing the tax as calculated by the tax authorities but reducing the "accounting" tax payable. Is this correct? Thank you for your instructional videos.
Well done! I like your interpretation. I agree that this stuff does make your head spin, and your brain hurt. I need to see it in front of me in T-accounts to grasp it myself. Maybe the follow-up videos on deferred tax assets vs deferred tax liabilities th-cam.com/video/7QKvzNV1Qw8/w-d-xo.html , and a deeper dive on deferred tax liabilities th-cam.com/video/wom7IBNnXM8/w-d-xo.html can help a bit more.
If the speech rate would have been more fast, this video would have definitely ended in just 40 seconds.
Thank you for the feedback. In the settings of a TH-cam video (bottom right corner), you can speed up or slow down the playback speed. Switching on the subtitles might also help easier understanding.
I though the pace was perfect! If it's too fast I have no time to think about the things he explain. Great video!
Start up 1st year , earning before tax is negative 100,000 less income tax 35,000 the earning after tax should be negative 135,000.
Please check and clarify
1:54
It's correct as shown in the video. If a pre-tax profit is made of $100K, then income tax expense on that is $35K, and net income after tax $65K. If a pre-tax loss of $100K, then income tax "refund" of $35K, and net loss shrinks to $65K. The whole point of deferred tax assets is that the refund is not claimable in cash from the tax authorities immediately, if the company never made a profit before.
Or in other words, more mathematically, - - (the minus of a minus) is a plus.
Hope this helps!
Where did you come across the accounting term "deferred tax assets"? Let me know by commenting below!
I go through a balance sheet of publicly listed company in India , so I search for DTA.
Thank you for such wonderful video.
@@manojtarte4932 Thanks for the feedback! :-)
The Finance Storyteller I am studying for CFA level 1 and I searched deferred tax regarding current assets
I work in Fixed/Leased Assets--involuntary conversions require knowledge of DTA.
Reading SEC filings (10-Ks, S-1s, 10-Qs) for my investments
your sound recording is so bad ... please change it
I have recently changed to a new setup. Hope you like the latest (2020) video better.
Thank you!
You're welcome! I have a related video on deferred tax liabilities as well: th-cam.com/video/wom7IBNnXM8/w-d-xo.html