Deferred tax basis essentially refers to the difference between the book value of an asset or liability and its tax value, leading to temporary differences in taxable income between accounting and tax reporting. When expenses are subject to deferred tax basis. This is the cost that is recognized in the financial statements for the current year, but it will only be deductible for tax purposes in a future year. If the timing differences lead to future tax benefits or obligations, deferred tax assets or liabilities are created.

An explanation is provided for a better comprehension:

A taxpayer's book basis is $800,000. In the event that the deferred tax asset (DTA) is $32,000 and the tax rate is 20%, what is the ta basis?
 

Deductible tax basis is the expense that will be applied in the next year of the current year. The expense that will be deferred to the following year is $160,000 ($32,000 tax basis / 20% tax rate).

The taxable income for the current year is $640,000, which is $800,000 less $160,000.

Conclusion: The company will have a deferred tax asset since it will receive a tax benefit in subsequent years when the expense becomes deductible.

What expenses may not be deductible in the current year, so they are delayed for the future year?

• Temporary differences between accounting standards and tax regulations may make some expenses in the current year undeductible. The expenses are postponed and will be deductible in future years. These are a few common examples:
• In accounting, warranty expenses are acknowledged upfront, but they can only be deducted for tax purposes when the actual costs are incurred.
• The depreciation schedule for accounting may not match the depreciation method used for tax purposes, including accelerated depreciation methods that are allowed for tax purposes.
• Accounting can calculate and identify bad debts as an expense, but they are only deductible for tax purposes if they are actually written off.
• Prepaid expenses like insurance or rent won't be deductible until the corresponding benefit is received in the future.
• Until the pending lawsuits or contingencies are paid or finalized, estimated liabilities for pending lawsuits or contingencies may not be deductible.
• If revenue is received ahead of time, corresponding expenses may not be deductible until it is recognized for tax purposes.
• Deferred expenses often form deferred tax assets that represent future tax benefits when the expenses are finally recognized for tax purposes.