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Sir,
In deferred tax whenever the carrying amount exceeds the tax base amount , it leads to a deferred tax liability. Can you please explain the logic behind it ? I find it difficult to understand the logic behind this .
Because the company is going to be charging depreciation on the carrying amount but that depreciation will exceed the tax allowances on that same asset
So the net profit for the year will be increased by the add-back of depreciation and reduced by the smaller figure of capital allowances
Over the life of the asset, the cost of that asset is allowable against profits for tax reasons
But where those allowances in the early years may exceed the company’s depreciation calculation, that results in a tax written down value that is lower than the carrying value – it’s as though the taxman has given the company accelerated benefit (when compared with the corresponding depreciation expense)
But that accelerated benefit is then later caught up as the company charges greater annual depreciation than the year’s tax allowance
Is that any better?
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