A deferred tax asset arises from deductible amounts; a deferred tax liability arises when taxable income exceeds accounting income. Which statement correctly describes them?

• A. A temporary difference that will reverse and increase future tax payments.
• B. A permanent tax difference.
• C. Temporary differences between accounting and tax bases; DTA arises from deductible amounts; DTL arises when taxable income exceeds accounting income.
• D. Taxes payable in the current year.

Answer: (C)

Deferred taxes come from timing differences between how items are recognized in financial reporting and in tax rules. These differences are temporary because they are expected to reverse in future periods, creating future tax effects.

A deferred tax asset is a future tax benefit that arises when deductible amounts reduce future taxable income. For example, if an expense is recognized for accounting purposes now but will be deductible for tax later, that creates a DTA.

A deferred tax liability is a future tax obligation that arises when taxable income will be higher in the future due to timing differences. For instance, when tax depreciation is accelerated relative to accounting depreciation, taxes payable in the early years are higher later on, producing a DTL.

These concepts hinge on the temporary nature of the differences between the accounting bases and the tax bases. Permanent differences, which never reverse, do not generate DTAs or DTLs. Taxes payable in the current year refer to current tax, not the deferred balance.