Example of deferred tax on Development Expenditure

Example of deferred tax on Development Expenditure

Development expenditures during year	$ 9,000
Amortization period of Development expenditure	3 years
Tax Deduction allowed in the year of expenditure
Tax Rate	15%

Calculate the deferred tax?

Solution

Basic Steps for Solution

1. Calculate the carrying amount

2. What is nature of Temporary difference i.e. taxable or deductible temporary difference?

3.  Tax Rate application on the temporary Difference

Basic Rules of Temporary difference Determination

1. Carrying amount is greater than Tax Base = taxable temporary difference = Deferred Tax liability

2. Carrying amount is less than Tax Base = deductible temporary difference= Deferred Tax Asset

Tip of solving the example

For liability use negative value and compare with tax bases and for asset use positive value and compare with tax bases.

1. Calculate the carrying amount  

Development expenditure	9,000
Amortization for year	(3,000)
Carrying amount	6,000

2. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	6,000	9,000	3,000	D.T.T*

Deductible Temporary Difference

3. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Asset
	6,000	15%	150

In above example the tax deduction was available on expenditure actually incurred during the year; this means the carrying amount would less than tax base.  In this example tax base is $ 9000 as this is allowed tax expenditure for the year.