Companies resort to deferring taxes procedures in cases when there is a need to reconcile and make adjustments to the taxable values of their assets and liabilities as well as adjustments that may occur as a result of time-based valuation (depreciation of asset values).

These adjustments need to be reflected in their tax returns, and must also include the reconciled values of different accounting and taxation computation standards.

Deferring taxes is a concept in accounting discipline that refers to a future tax payment obligation or liability due to two conditions: temporary difference and timing difference.

Temporary difference refers to the deviation between the accounting book value of the assets and liabilities and their actual tax value; while timing difference refers to the deviation between the financial statement’s declared recognition of gains and losses and the federal standard tax computations.

Temporary difference deferring taxes include two categories of differences: Taxable, which means there is a taxable amount in future periods after the asset or liability value is settled; and Deductible, which means the company will have deductible amounts in the future after the asset or liability value is settled.

Deferring taxes is allowed due to the financial industry’s recognition of the need for a Matching Principle that takes into consideration accrued values and an expected revenue or recognized revenue. Generally, deferring taxes is a practice that helps a company and its shareholders understand, foresee and prepare them for future tax liabilities.