One phrase you might run across when handling the accounts for your business is deferred tax credit.
Although it sounds complicated, don’t worry; over time, this idea will prove to be rather useful for your company.
Let’s simplify what it means in common language.
Deferred tax:
Deferred tax results from differences between income shown in your accounting records and income reported to the tax department.
This yields:
- delayed tax asset: Now you pay more taxes; but, you can cut taxes going forward.
- You pay less tax now but have to pay more in the future.
Deferred tax credits are what?
A deferred tax credit is a benefit your company gains from paying extra taxes resulting from transient variances.
One can use this credit to reduce taxes in next years.
As an illustration:
Assuming your company shows a profit of ₹10 lakh in accounting books but only ₹8 lakh for tax due of additional depreciation permitted under the Income Tax Act.
Now you pay less tax; but, you will pay more going forward.
A deferred tax credit lets one change that future extra tax.
When Does It Re Apply?
- Variances in tax and accounting book depreciation rates
- Expenses let shown in tax books in a different year
- Income entered into books but taxable subsequently
- Loss carry forward
Advantage of Deferred Tax Credit
- reduces your upcoming tax obligations
- enhances your financial flow
- facilitates more effective tax payment planning
- shows your financial statements’ actual profit picture
How to Claim Tax Credit Deferred
- Keep accurate financial records
- Record variations in book and tax income
- Clearly state it on your financial statements
- Usually computed and displayed by your CA or accounting department
Important Notes to Remember
- Only fleeting variances count
- Has to be supported by appropriate records
- Under a new tax system, businesses might not gain this advantage
- Not relevant for either non-corporate taxpayers or individuals
Common Errors
- Not accurately monitoring deferred tax totals
- False reporting of permanent variations as transient
- Ignoring to flip it in next years
