Question

An example of a book-tax difference resulting in a deferred tax asset is the excess of accelerated MACRS depreciation over GAAP straight-line depreciation. This difference leads to:

A) A decrease in tax expense
B) A deferred tax liability
C) A current tax asset
D) An increase in taxable income

Answer 1

A book-tax difference resulting in a deferred tax asset occurs when there is an excess of accelerated MACRS depreciation over GAAP straight-line depreciation, leading to an increase in taxable income.

Step-by-step explanation:

A book-tax difference resulting in a deferred tax asset occurs when there is an excess of accelerated MACRS depreciation over GAAP straight-line depreciation.

This difference leads to a increase in taxable income.

For example, let's say a company uses MACRS accelerated depreciation for tax purposes, which allows them to deduct a larger portion of the asset cost in the earlier years. However, for financial reporting purposes (GAAP), they must use straight-line depreciation which spreads the deduction more evenly across the useful life of the asset. This creates a difference in the timing of the deductions, resulting in a higher taxable income under GAAP compared to the tax return. The deferred tax asset reflects the future tax benefits the company will receive when they are able to deduct the difference in future years.