Which description best defines deferred income taxes?

Which description best defines deferred income taxes?

• A. A liability account to pay income taxes postponed to a future year's return, which can also appear as an asset representing future tax savings.
• B. A cash account for current tax payments.
• C. An expense recognized in the current year.
• D. An equity account showing retained earnings.

Answer: (A)

Deferred income taxes capture the tax effects of timing differences between how income and expenses are recognized for financial reporting and for tax purposes. These differences create amounts that will affect taxes in a future period, so they show up on the balance sheet as either a deferred tax liability (taxes that will be payable in the future) or a deferred tax asset (future tax savings or deductions). This description best reflects that these are non-cash, future-oriented tax effects arising from current transactions or events, not cash payments, current-year expenses, or equity. For example, using different depreciation methods for book vs. tax purposes can create a deferred tax liability, while loss carryforwards or tax credit carryforwards can create a deferred tax asset.

Deferred income taxes capture the tax effects of timing differences between how income and expenses are recognized for financial reporting and for tax purposes. These differences create amounts that will affect taxes in a future period, so they show up on the balance sheet as either a deferred tax liability (taxes that will be payable in the future) or a deferred tax asset (future tax savings or deductions). This description best reflects that these are non-cash, future-oriented tax effects arising from current transactions or events, not cash payments, current-year expenses, or equity. For example, using different depreciation methods for book vs. tax purposes can create a deferred tax liability, while loss carryforwards or tax credit carryforwards can create a deferred tax asset.