Skip to main content Skip to main content
Not investment advice. Educational reading. See Disclaimer.
L.12 · INTERMEDIATE · 2 MIN

Deferred Taxes: Why Tax Expense Differs from Taxes Paid

A company's income tax expense on the income statement almost never equals what it actually pays the IRS. The difference creates deferred tax assets and liabilities.

Quiz · 5 questions ↓
§ 01
SituationCreatesExample
Tax expense > cash taxes paidDeferred Tax Liability (DTL)Accelerated depreciation for tax purposes
Tax expense < cash taxes paidDeferred Tax Asset (DTA)Warranty reserves, bad debt estimates
Large NOL carryforwardDeferred Tax AssetYears of losses that can offset future income
§ 02

A large DTA from net operating losses means the company can earn future profits tax-free until the DTA is used up. This can be very valuable, but only if the company actually becomes profitable.

§ 03

Effective tax rate (tax expense / pre-tax income) is more useful than the statutory rate for comparing companies. Rates below 15% may indicate aggressive tax planning or large DTA offsets.

§ 04
Company reports tax expense $100M. Cash taxes paid: $60M. Difference?
Five questions · AI feedback

Sit with the ideas.

A company has $200M in deferred tax assets from NOL carryforwards. It has lost money for three consecutive years. Its new CEO announces the DTA is 'more likely than not' to be realized and releases the valuation allowance, boosting net income by $200M. Should you trust this?

Why:

Other lessons in this course.

  1. 01Accrual vs Cash Accounting
  2. 02Depreciation: Spreading the Cost of Assets
  3. 03Stock-Based Compensation: The Hidden Cost
  4. 04Adjusting Entries: Why Period-End Matters
  5. 05Revenue Recognition: The ASC 606 Five-Step Model
  6. 06Bad Debts: When Customers Don't Pay
  7. 07Inventory: FIFO vs. LIFO and Why It Matters
  8. 08PP&E Deep Dive: Four Depreciation Methods and Asset Disposal
  9. 09The Cash Flow Statement: Follow the Actual Money
  10. 10DuPont Analysis: Decomposing Return on Equity
  11. 11EPS and Dilution: The Most Watched Number on Wall Street
  12. 12Deferred Taxes: Why Tax Expense Differs from Taxes Paid— reading now
  13. 13Lease Accounting: The Hidden Debt That Isn't So Hidden Anymore
See it on a real ticker →