What are deferred taxes?

Deferred taxes arise from the difference between the tax liability based on the taxable profit and the hypothetical tax that would result from the profit of the commercial balance sheet.

A tax relief or obligation transferred to the future

The accounting and valuation rules for the tax balance sheet differ from those of the commercial balance sheet. Deferred taxes must be recorded whenever the taxable profit temporarily deviates from the commercial success.

Thus, deferred taxes compensate for a temporary difference between the tax balance sheet and the commercial balance sheet, with the item being possible on both the asset and liability sides.

Active deferred taxes for example tax loss carryforwards

If a company has incurred losses, it can create tax loss carryforwards to offset these against possible future profits. In this way, future tax payments can be effectively reduced. For the future tax savings, the position "Active deferred taxes" is created on the asset side of the balance sheet. The corresponding journal entry is: Active deferred taxes to tax expense. In the years when the company earns profits, it can reduce tax payments by settling the asset position. The corresponding journal entry is: Tax expense to Active deferred taxes. Active deferred taxes thus represent a future tax relief.

Passive deferred taxes for example depreciation

A company makes an investment and thereby increases its fixed assets. In the tax balance sheet, the expense must be fully recorded, while in the commercial balance sheet the costs can be depreciated over several years. Through the tax-legally higher expense, effectively too low taxes are paid from the commercial perspective. With the journal entry "Tax expense to Passive deferred taxes," a liability position is created for the difference and dissolved in subsequent years when the taxable profit is higher. Passive deferred taxes thus represent a future tax obligation.