Example of deferred tax on losses carried forward

Example of deferred tax on losses carries forward

Carry forward Losses	200,000
Tax Rate	15%

Calculate the deferred tax?

Solution

Steps for Solution

1. Determine nature of Temporary difference i.e. taxable or deductable temporary difference

2. Apply the Tax Rate

Rules for determining the Temporary Difference

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

In case of carry forward losses the carrying value is zero.

1. Nature of Difference

year	Carrying Amount	Tax Base	Temporary Difference	Nature of Difference
1	0	200,000	200,000	D.T.D*

Deductable Temporary Difference

2. Deferred Tax

year	T.T.D	Rate of Tax	Deferred Tax Asset
	200,000	15%	30,000

In above example the carrying value of liability is nil, while the amount of losses carried value is tax bases for the purpose of calculation of deferred tax. As the tax bases is greater than tax bases so this would result in deductible temporary difference and deferred tax asset.