1. Introduction
Deferral taxes are taxes which are accrued but not paid until some future period, although they are recognized as a liability in the financial statement period when they are generated. This type of liability is commonly referred to as a “deferred tax liability”. The deferred tax liability may occur when a taxpayer has incurred expenses in the current tax year that will be deducted in a future year, or when income earned in the current tax year will only be taxable in a future year.
In some cases, the deferred tax liability affects a company’s overall performance, by providing additional cash flow for the future. Deferred tax liabilities can also help reduce a company’s tax liability in the current year and can provide a way to plan for future tax liabilities.
2. The importance of Deferred taxes
The purpose of deferred taxes is important to ensure that companies do not incorrectly report their income in any given year. Companies must recognize deferred taxes by either recognizing a deferred tax asset or a deferred tax liability.
Deferred tax assets are created when companies are able to accrue, but not pay, taxes in the same year, and have an expectation that the tax liability will be deferred, or reduced, in a future year. Deferred tax liabilities, on the other hand, are generated when a company has recognized an expense in the current period that will be deductible in a future period, such as deductions taken for depreciation and amortization.
The benefits of deferred tax liabilities are that they can be used to reduce future tax liabilities, provide cash flow for the current period, and plan for future tax liabilities. Additionally, deferred taxes are useful for companies in regards to managing their cash flow, as the timing of recognition for the liability may be beneficial to the company depending on the timing of their cash inflows and outflows.
3. Key Considerations
It is important to consider several factors when determining the severity of a company’s deferred tax liabilities and the potential impact it could have on the bottom line. Generally speaking there are two main considerations that must be taken into account when assessing the deferred tax liability of a company; timing and amount.
Timing is an important factor to consider when assessing the impact of deferred taxes on the bottom line because it will impact when the liability will be realized. If the timing of the deferred tax liability aligns with the influx of money from other sources, such as cash from operations, then the strength of the cash flow from this source is weakened. If the timing of the deferred tax liability does not align with the influx of money from other sources, then the strength of the cash flow from this source is increased.
In addition to timing, it is also important to consider the amount of the deferred tax liability. Generally, the larger the liability, the more significant the impact it will have on the financial statements, and cash flow.
4. Conclusion
In conclusion, understanding the potential impact of deferred tax liabilities on the bottom line is paramount in order to make informed business decisions. Companies must understand the timing of deferred taxes and the amount of the liability in order to ensure that they are accurately represented on the financial statements and that the business operations are in line with the company’s goals and objectives. Through this analysis, companies can effectively plan for and manage future tax liabilities and ensure that their operations are running in a manner that maximizes their cash flow.