Deferred Taxes

There can be differences in the amount of taxes payable, determined on the basis of financial accounting vis-a-vis tax accounting. One such item which an cause this distortion relates to the treatment of depreciation. For instance, for income-tax reporting, the machine may be subject to higher rate of depredation compared to financial accounting. This lowers the taxes payable in the early years of machine purchased and increases the taxes payable in the latter years. Deferring tax liabilities to the future years is referred to as deferred taxes. As a result, increase in deferred tax liabilities are considered as cash inflows and decrease as cash outflows.

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