Question

How will a reduction in tax rates impact a deferred tax asset balance?

How will a reduction in tax rates impact a deferred tax liability balance?

Answer 1

a) A reduction in tax rate will reduce the deferred tax asset balance.

Deferred tax asset arises due to overpayment of taxes which will create an asset for the entity in the future.

An example of deferred tax asset is tax amount on carried forward loss at the prevailing tax rate.

So if the tax rate increases the deferred tax asset balance also increases resulting in increased deferred tax income.

However if the deferred tax income and asset balance reduces, if the tax rate decreases.

b) A reduction in tax rate will reduce the deferred tax liabilities balance.

Deferred tax liability arises due to under payment situation of tax i.e it creates a future tax liability.

An example of deferred tax liability is difference in depreciation due to tax and accounting treatments.

if the tax rate decreases it will reduces the deferred tax liability balance there by reducing the future tax expenses.