Deferred Tax Assets and Liabilities Under US GAAP
By SimplyCPA · 11 October 2026
On this page (8)
- Temporary differences: Differences between book and tax bases that reverse — taxable ones create deferred tax liabilities (DTLs); deductible ones create deferred tax assets (DTAs).
- Permanent differences: Never reverse (municipal bond interest, fines, the non-deductible half of meals) and never create deferred taxes — they change the effective rate.
- Measurement: Temporary difference × the enacted rate expected when it reverses. A rate change is recognised in continuing operations in the period of enactment.
- Valuation allowance: Reduce a DTA if it's more likely than not (over 50%) that some or all of it won't be realised.
- Uncertain tax positions: A two-step test — recognise only if more likely than not to be sustained, then measure at the largest amount over 50% likely to be realised.
The idea
Book income (US GAAP) and taxable income (the Internal Revenue Code) recognise some items in different periods. ASC 740 requires companies to recognise the future tax consequences of those differences today, so the income statement shows tax expense that matches book income.
Total income tax expense = Current tax expense (taxes payable this year) + Deferred tax expense (change in net DTL) − Deferred tax benefit (change in net DTA).
Temporary vs permanent differences
| Item | Type | Effect |
|---|---|---|
| Accelerated tax depreciation (MACRS or bonus) vs straight-line book | Temporary, taxable | DTL |
| Instalment sales (taxed when cash is collected) | Temporary, taxable | DTL |
| Warranty and bad-debt accruals (deductible when paid or written off) | Temporary, deductible | DTA |
| Rent or subscriptions received in advance (taxed on receipt) | Temporary, deductible | DTA |
| Net operating loss carryforwards | Carryforward | DTA |
| Municipal bond interest; life insurance premiums where the company is beneficiary; fines and penalties | Permanent | None — affects the effective rate |
Worked example: DTL and DTA together
In Year 1, pre-tax book income is $500,000. Tax depreciation exceeds book depreciation by $60,000 (reverses evenly over three years). Warranty expense accrued but not yet paid is $20,000. Municipal bond interest of $10,000 is included in book income. The enacted rate is 21% for all years.
- Taxable income = $500,000 − $60,000 + $20,000 − $10,000 = $450,000 → current tax = $94,500
- DTL = $60,000 × 21% = $12,600; DTA = $20,000 × 21% = $4,200 → net deferred tax expense = $8,400
- Total tax expense = $94,500 + $8,400 = $102,900
- Effective rate = $102,900 ÷ $500,000 = 20.6% — below 21% only because of the permanent difference ($10,000 × 21% = $2,100).
Rate changes
Deferred taxes are measured using the enacted rate for the year the difference reverses — never a proposed rate. When a new rate is enacted, all existing DTAs and DTLs are remeasured, and the whole effect goes to income tax expense from continuing operations in the period that includes the enactment date — even if the original item was recorded in other comprehensive income.
The valuation allowance
A DTA is reduced by a valuation allowance if, based on all available evidence, it is more likely than not that some or all of it will not be realised. Sources of taxable income that support realisation include future reversals of existing taxable temporary differences, future taxable income, taxable income in carryback years where allowed, and tax-planning strategies. Cumulative losses in recent years are significant negative evidence that is hard to overcome.
Uncertain tax positions (ASC 740-10)
- Recognition — recognise the benefit only if it's more likely than not that the position will be sustained on examination by the tax authority, assuming it has full knowledge.
- Measurement — measure it at the largest amount of benefit that is more than 50% likely to be realised on settlement.
The difference between the benefit claimed on the return and the amount recognised is an unrecognised tax benefit, usually a liability.
Presentation and disclosure
- All DTAs and DTLs are noncurrent, netted within each tax-paying component and jurisdiction.
- ASU 2023-09 expands disclosures: public business entities must show a rate reconciliation with specific categories and income taxes paid disaggregated by jurisdiction, for annual periods beginning after December 15, 2024 (a year later for other entities).
Work through the full topic in our FAR income taxes notes, and compare with the tax side in tax basis vs book basis.