How to Calculate Deferred Income Taxes
Original post by Sean Mullin of Demand Media
Deferred income taxes refer to the income tax liability a company would need to pay if it liquidated its operational assets and the capital assets included on its financial statements. Understanding a company's deferred income tax liability gives an investor a better idea of its financial standing. Companies may be overstating their total equity if they do not include deferred income tax liabilities in equity calculations.
Create a list of all the company's cash and assets, including inventory, investments, real estate, buildings, vehicles and machinery. Research the fair market price of all capital assets. Add the value of capital assets to the sum of cash to create a figure of total equity before taxes and liabilities.
Subtract accounts payable and employee compensation funds from the total equity.
Research tax rates and all possible tax deductions. Subtract deductions from each asset category. Add together taxable assets, and multiply by an accurate or assumed income tax rate to create an estimate of deferred income tax liabilities.
Subtract deferred income taxes from total equity to create a more accurate total equity estimate for the company.
- "Understanding the Effects of Deferred Income Taxes on Your Operation"; Todd A. Doehring; June 2001 (PDF)
- "Intermediate Accounting"; Donald E. Kieso et al.; 2010 (p. 1042)
About the Author
Sean Mullin has been creating content for providers such as eHow since 2007. He also worked in an online writing center for college students. In addition to writing, Sean has a Master of Arts in classics and teaches Greek and Latin part-time at the college level.
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