According to the accrual accounting principle, if the accounting has already recognized a revenue or profit, such income tax expense (IR) must be recognized in the same period, even if such revenue and profits are deferred for tax purposes. But what does the term “deferred” mean? Do you know what is deferred income tax? Do you know what needs to be done in these situations? Today’s text, we will address some considerations about the nature, mandatory and correct timing of income tax accounting that affect profits with deferred taxation.
WHAT IS DEFERRED INCOME TAX?
To differ means to postpone, that is, to leave it for later. Thus, we can understand deferred income tax as something to pay later. Deferred income is income with a grace period and deferred income is one whose initial value is calculated before the beginning of income. As under the accrual method of accounting and financing, when a company receives money from a client, its priority is to earning from it, the company will have to make the following entry:
- Debit Cash
- Credit a liability account such as deferred income tax, Deferred Income and Unearned Revenue
The credit to the liability account is made because the company has an obligation to deliver the goods or services (or to return the money) to the customer and has not yet earned the money from business. According to accountants, the company is deferring the revenue until it is earned. The liability will be decreased and a revenue account will be increased, if the company start earning. Accordingly, deferred income tax occurs when certain costs or expenses, which were already recorded in the year, are deductible for income tax purposes only in subsequent years, when they are actually paid. But why does this happen? The explanation is simple: temporary differences arise when revenues or expenses are included in the accounting result in one period and the taxation of these expenses is included in a different period. That is, there is a difference between the accounting profit and the tax profit that is used to calculate the Income Tax. Such differences are recorded in the Real Profit Calculation Book (LALUR).
If we recognize a revenue or profit in accounting, the expense with income tax must be recognized in that period, even if it is payable at a future date. Thus, we have that a postponed IR liability has its value recorded within the expense of the tax in the period in which we accounted and its due credit, subsequently.
HOW IS THIS MEASURED?
Deferred tax assets and liabilities should be quantified at the tax rates that are expected to be applied in the period of realization of the asset or settlement of the liability, using tax values in force on the balance sheet date. Current and previous period currents must be quantified by the amount expected to be paid to the Tax Authorities, applying the tax rates in force on the balance sheet date.
WHAT ARE THE BENEFITS OF DEFERRED INCOME TAX?
The benefits of the deferral must be enjoyed under the terms of the legislation and in the specific cases provided for, such as:
- Adjusted monetary correction credit balance;
- Long-term contracts for the supply of goods and construction by contract to the government and state entities;
- Capital gain from expropriation;
- Capital increase related to the sale of fixed assets, with payment in installments;
- Accelerated depreciation and others.
In all cases, according to the accrual basis, the income tax expense must be accounted for in the same period in which the corresponding profit was identified. Likewise, in such operations, it is always necessary to account for profit in the exercise of its generation and the expense of Taxes must refer to the same period, even if paid in subsequent years.
Finally, we can affirm that the procedure adopted by companies and all legal entities taxed by taxable income that the accounting for the provision for deferred income tax is necessary in view of science and corporate law, as its absence disobeys the competence regime of the as well as the accrual accounting principle. And both must be enforced under the law.
HOW TO DECLARE INCOME TAX INVESTMENTS?
At the end of each year for assets management, banks, brokers, and institutions are responsible for sending the income reports of their respective investments to each investor. This includes the data that must be declared in the income tax already calculated.
WHICH INVESTMENTS SHOULD BE DECLARED AND HOW TO MAKE THE DECLARATION:
Well, first of all, it is necessary to point out that all investments need to be declared, whether they are taxable or exempt from payment of tax.
HOW TO DECLARE INVESTMENTS TO THE IR IN THE RESPECTIVE TABS IN THE DIRPF DOCUMENT:
Assets and Rights: the investor informs the total balance of his investments, that is: all investments need to be informed in this tab. Also in the Property and Rights tab, the investor must inform their investments in Shares, ETFs (Exchange Traded Funds) and in Real Estate Funds.
Income Subject to Exclusive / Definitive Taxation: tab where investments are already taxed – such as Treasury Direct, CBD and investment funds;
Exempt and Non-Taxable Income: applications exempt from Income Tax are recorded in this tab: Savings, LCI, LCA and incentive debentures;
Payments made: in this tab the investor informs his applications in PGBL and in pension funds.
WHAT INVESTMENTS ARE EXEMPT FROM PAYING INCOME TAX?
Some investments, even though they are exempt from taxation, still need to be included in your annual income tax return. They are:
- LCI – Real Estate Credit Bill
- LCA – Agricultural Credit Bill
- CRI – Real Estate Receivables Certificate
- CRA – Agribusiness Receivables Certificate
- Encouraged Debentures