what is deferred tax with example?

Answer 1

Deferred tax is based upon the difference in the way things are treated for financial statement accounting (i.e., book or GAAP) and tax accounting.

For example, if you have one asset which cost $100,000, was purchased on 1/1, and you depreciate it using 10 year straight line for book purposes, and 5 year 200% declining balance for tax purposes, in the first year you would take a depreciation deduction for book purposes of $10,000, and a depreciation deduction of $20,000 for tax purposes. This would decrease your tax liability in the first year. However, your tax liability in future years would increase, since there will come a time when your tax depreciation deduction will be less than your book depreciation deduction. The amount of the difference is considered a deferred tax.

Answer 2

An IRA account is an easy example. You deduct amounts put in now but pay taxes when you take funds out later. That is taxes deferred until retirement.

Answer 3

Depending on the context, one of the first to answers is correct. If the second applies to your situation, 'tax deferred' is the correct term.