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Blue Sky Company reported the following results for the year ended December 31, 2021, its first...

Blue Sky Company reported the following results for the year ended December 31, 2021, its first year of operations:

2021

          Income (per books before income taxes) $ 1,500,000

          Taxable income    3,200,000

The disparity between book income and taxable income is attributable to a temporary difference which will reverse in 2022. What should Blue Sky record as a net deferred tax asset or liability for the year ended December 31, 2021, assuming that the enacted tax rates in effect are 35% in 2021 and 20% in 2022?

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Answer #1

Income (As per books) = $ 15,00,000

Taxable income (As per Tax Laws) = $ 32,00,000

The company has shown book income of $15,00,000. However, the Company needs to pay tax as per tax laws on taxable income of $ 32,00,000 in next year (2022) , where tax rate is 20%. Since, taxable income is greater than book income, it will record the temporary difference into a Deferred Tax Liability (DTL) for the year ended December 31, 2021.

DTL Amount = (32,00,000 * Tax rate of 2022 i.e.20%) - (15,00,000 * Tax rate of 2021 i.e.35%) = $ 1,15,000.

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