Question

First Year of Operations - 2019	Dr.	Cr.
Cash	80,000
Accounts Receivable	110,000
Machine-bought January-1, 2019	100,000
Acc. Deprec.-Straight-Line- 5 years		20,000
Common Stock		180,000
Retained earnings
Home repair revenue		400,000
Depreciation expense	20,000
Salary of owner (Molly)	200,000
Other expenses	90,000
Totals	600,000	$600,000
There is no state income tax. Federal income tax rate: 21%

Molly owns all the stock of Elite Corporation, which she organized on January 2, 2019. Molly is CEO and receives an annual salary of $200,000. Elite will report depreciation expense of $20,000 on the corporate tax return.

Assume Molly elects to deduct the entire cost of the machine on the 2019 tax return.

What is the balance in the deferred tax liability account of Elite (a C corp.) at end of 2020?

Answer 1

Depreciation Expense as per books = $20,000

Depreciation Expense as per tax return = $100,000

Temporary Difference = $80,000

Tax rate = 21%

Deferred Tax Liability at the end of 2019= $80,000 * 21% = $16,800

For the year 2020,

Depreciation Expense as per books = $20,000

Depreciation Expense as per tax return = $0

Temporary Difference = $20,000

Thus deferred tax liability reversal in the year 2020 = $20,000 * 21% = $4,200

Thus the balance of deferred tax liability at the end of 2020 would be = $16,800 - $4200 = $12,600

Feel free to ask for any clarification, if required. Kindly provide feedback by thumbs up. It would be highly appreciated. Thank You.