Deferred Tax Assets

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Deferred Tax Assets
There are a few accounting differences between tax (IRS) accounting and US GAAP accounting. Some differences cause deferred tax asset which is a future tax benefit.

For example, say a firm currently is offering a special onetime 2-year warranty when a customer purchases its product. The firm estimates that over a 2-year period it is likely to spend a total of $200,000 in warranty repairs. The following presents the reported income for this 2-year period using US GAAP rules: Year 1 Year 2
Income before warranty expense $6,000,000 $6,000,000
Warranty expense ­­­__ 200,000 ­___-___
Pre-tax income 5,800,000 6,000,000
Provision for income taxes (34%) 1,972,000 2,040,000
Reported net income $3,828,000 $3,960,000 *US GAAP recognizes the warranty expense when the sale (and warranty commitment) is made.
The IRS only allows a taxpayer to deduct actually paid warranty expense, not projected. Consequently, the following is reported to the IRS assuming that the warranty actually does cost $100,000 each year over this 2-year period: Year 1 Year 2
Income before warranty expense $6,000,000 $6,000,000
Warranty expense ­­­__ 100,000

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