From the Latin term "latere" derives the expression latent. Into German it can be translated with "in the hidden remain" or " not yet visibly". Deferred taxes in accounting are also taxes that are not incurred at the moment.
The definition of deferred taxes
Deferred taxes are fictitious charges or. Receivables in income tax understood that arise due to different accounting approaches between commercial and tax balance sheet. You probably know that assets and liabilities, as well as prepaid expenses, can be valued differently for financial reporting purposes than for tax purposes. In most cases, however, these other valuation approaches only lead to temporary shifts in the tax. The differences are reduced again in the following fiscal years. This is exactly how you recognize a deferred tax.
Deferred taxes always refer to income taxes of companies. So, for sole proprietorships and partnerships, it only affects trade tax, for corporations it also affects corporate income tax. Smaller companies within the meaning of the Commercial Code (HGB) § 264a are exempt from the obligation to form deferred taxes.
Deferred taxes in international comparison
In Germany, the recognition of deferred taxes in accounting has not been relevant for so long. It was not until the German Accounting Law Modernization Act (BilMoG) came into force in 2009 that deferred tax assets and liabilities became more important. While the previous concept was strongly oriented towards the determination of results and thus towards the profit and loss statement (P&L) (timing concept), now a temporary concept is followed. This focuses much more clearly on the commercial and tax balance sheets and the differences in the valuation of assets and liabilities. So, in the interest of creditors, the company's net worth is more realistically represented. At the same time, the legislator adapted the German HGB regulations regarding deferred taxes to internationally accepted accounting standards such as IFRS and US-GAAP.
Deferred tax assets and liabilities
Simply explained, then, deferred taxes are anticipated tax liabilities or. -refunds. If you want to calculate deferred taxes, you must subject the determined difference between the balance sheet total of your commercial and tax balance sheet to the company's own tax rate that would apply in the current fiscal year. Depending on which side of the balance sheet the items are located, tax experts distinguish between deferred tax assets and deferred tax liabilities.
There are separate G/L accounts in the balance sheet for both deferred tax assets and deferred tax liabilities:
| Overview of accounts |
SKR03 |
SKR04 |
| Deferred tax assets (stock) |
0983 |
1950 – 1999 |
| Deferred tax liabilities (inventory) |
0968 |
3065 – 3069 |
In the context of the annual financial statements, the balance sheet accounts are posted to. contra account for the changes are the corresponding P&L accounts:
| Overview of accounts |
SKR03 |
SKR04 |
| Expenses from additions to and reversal of deferred taxes |
2250 – 2254 |
7645 |
| Income from additions to and reversal of deferred taxes |
2255 – 2259 |
7649 |
Deferred tax assets
Deferred taxes on the assets side of the balance sheet arise when the commercial balance sheet shows lower assets or higher liabilities than in the tax balance sheet. Such differences arise, for example, in these circumstances:
| Facts |
Commercial balance sheet |
Tax balance sheet |
| Depreciation of permanent impairment of assets |
Capitalization requirement |
Option |
| Amortization of purchased goodwill |
Obligation to capitalize, duration: estimation of useful life allowed |
Capitalization requirement, duration: 15 years |
| Application of simplification procedures in the valuation of inventories |
Consumption tracking procedures FiFo (First in – First out) and LiFo (Last in – First out) are allowed |
LiFo is not allowed |
| Recognition of a provision for contingent losses in a pending transaction |
Capitalization requirement |
Not permissible |
There is an option for the recognition of deferred tax assets in the HGB financial statements. However, they are only recognized if they are higher than the deferred tax liabilities, i.e. there is a surplus of deferred tax assets.
In the case of deferred tax assets, existing loss carryforwards must also be taken into account if a loss settlement is expected in the next five years. Must be capitalized in accordance with HGB § 274. This means that tax planning in companies is of particular importance.
The effect of the different valuation of assets in the commercial and tax balance sheets and their compensation through deferred taxes using an example:
ABC-Dreherei GmbH manufactures turned parts for the mechanical and plant engineering industry with a state-of-the-art machine park. For the last fiscal year, the following facts must be taken into account when preparing the balance sheet:
a) Due to a cable fire there was damage to a turning machine. The permanent impairment of the machine, which still has a book value of 100.000 € in the balance sheet is 50 percent.
b) Management decided to buy out a small powder coating company whose goodwill amounted to 600.000 € amounted to. Under tax law, this goodwill must be amortized over 15 years. However, based on the expert opinion prepared when the business was acquired, the company arrives at a useful life of 10 years.
c) Inventories are valued in accordance with the LiFo method under commercial law. The inventory value is 450.000 €. However, for tax purposes only the FiFo method is allowed, the value increases to 500.000 €.
A tax burden of 30 percent is assumed.
| Facts |
Commercial balance sheet |
Tax balance sheet |
| Amortization of the permanent impairment of the lathe |
Capitalization obligation: 50.000 € |
Option, not used |
| Amortization of goodwill acquired by purchase |
Must be capitalized, duration: 10 years = 60.000 € / year |
Capitalization requirement, duration: 15 years = 40.000 €/year |
| Valuation of inventories |
LiFo : 450.000 € |
FiFo: 500.000 € |
If there are no other differences between the two balance sheets, the commercial balance sheet shows goodwill amortized by 120.000 € lower balance sheet total than the tax balance sheet. With a tax burden of 30 per cent would be thus 40.000 € deferred tax assets to be recorded.
Therefore, if the company did not recognize any deferred tax liabilities this year, it could make use of the option and capitalize the deferred tax assets. As an accountant, you record the entry via the P&L:
Deferred tax assets 40.000 € to
Income from additions to deferred taxes 40.000 €
Deferred tax liabilities
If, on the other hand, the assets in the commercial balance sheet are valued at a higher or. the liabilities are reported at a lower amount than in the tax balance sheet, deferred tax liabilities arise. The section 274 para. 1 of the HGB obliges the taxpayer to book a deferred tax liability, so there is no right of choice here. The following examples can cause deferred passive taxes:
| Facts |
Trade Balance |
Tax balance sheet |
| Recognition of internally generated assets in fixed assets |
Elective right |
Not allowed |
| Different valuation approaches in accounting for foreign currency liabilities |
Recognition at the spot exchange rate on the balance sheet date even in the event of falling exchange rates |
Consideration of a lower value is not provided for if the exchange rates have not fallen permanently |
In the spin from our example, these examples result in deferred tax liabilities:
a) When a new lathe is purchased, a special chuck is needed to produce a certain type of turned parts. The management has this component manufactured in-house. The incurred cost price of 5.000 € the company records under the manufacturing costs of the machine. Thus, it exercises its right to choose to capitalize self-created assets.
b) Last year, the GmbH took out a loan in US dollars from an overseas supplier. It was booked in euros at the exchange rate of $1 = €0.86 on the day the loan was disbursed. The outstanding loan amount is currently still 100.000 US dollars, which would be 86.000 euros. However, as of the balance sheet date, the exchange rate has fallen: 1 dollar = €0.84. The lathe shop must measure the value of this liability in the commercial financial statements using the spot exchange rate and now only records 84.000 Euro. For tax purposes, the change may not be recognized, since a permanent reduction in the exchange rate cannot be assumed here.
| Facts |
Commercial balance sheet |
Tax balance sheet |
| Recognition of internally generated assets in fixed assets |
Capitalization option 5.000 € |
Prohibition of capitalization |
| Different valuation approaches to accounting for foreign currency liabilities |
Book value 84.000 €, recognition of other operating income in the amount of 2.000 € |
No consideration of course change allowed |
Assuming a tax burden of 30 percent, deferred taxes are attributable to the 7.000 € difference between the commercial and tax balance sheets 2.100 € to be recorded as a deferred tax liability. To post these deferred taxes, you use the appropriate accounts:
Expenses from additions to and reversal of deferred taxes 2.100 €
Deferred tax liabilities 2.100 €
Deferred tax assets and liabilities in your business is a topic you should discuss with your tax advisor as part of the financial statement process. He can recommend which tax elections you should exercise to achieve your business goals and also help you with your tax planning over several years.
