What is a deductible temporary difference?

What is a deductible temporary difference?

• A. A difference that results in taxable amounts in current periods
• B. A difference that will lead to deductible amounts in future periods
• C. A liability that cannot be deducted
• D. Any temporary difference that is tax-exempt

Answer: (B)

A deductible temporary difference refers to a situation in which the carrying amount of an asset exceeds its tax base, or the carrying amount of a liability is less than its tax base. This scenario creates a difference that results in amounts that can be deducted in future tax periods. Consequently, it allows the entity to pay lower taxes in the future because it can capitalize on the deductible amounts as these differences reverse over time. This concept is crucial in understanding the deferred tax implications on financial statements. In terms of financial reporting, recognizing deductible temporary differences can lead to the creation of a deferred tax asset. Such an asset shows potential future tax benefits that will arise when the difference reverses, allowing the entity to reduce taxable income in future periods. The other options do not accurately reflect the definition of deductible temporary differences. Instead, they discuss various scenarios that do not match the criteria for this specific type of difference in accounting for taxes.

A deductible temporary difference refers to a situation in which the carrying amount of an asset exceeds its tax base, or the carrying amount of a liability is less than its tax base. This scenario creates a difference that results in amounts that can be deducted in future tax periods. Consequently, it allows the entity to pay lower taxes in the future because it can capitalize on the deductible amounts as these differences reverse over time.

This concept is crucial in understanding the deferred tax implications on financial statements. In terms of financial reporting, recognizing deductible temporary differences can lead to the creation of a deferred tax asset. Such an asset shows potential future tax benefits that will arise when the difference reverses, allowing the entity to reduce taxable income in future periods.

The other options do not accurately reflect the definition of deductible temporary differences. Instead, they discuss various scenarios that do not match the criteria for this specific type of difference in accounting for taxes.