How to Use Accounting Software to Manage and Track Deferred Taxes?

Posted In | Finance | Accounting Software

Deferred taxes are an essential concept in accounting, referring to the temporary differences between the tax liabilities reported on financial statements and the actual tax amount owed. These differences arise from differences in the timing of income recognition, expenses, and tax deductions. Managing and tracking deferred taxes can be a complex process, but utilizing accounting software can significantly simplify this task. This article will discuss how accounting software can be used to manage and track deferred taxes effectively and accurately.
 

 

1. Understanding Deferred Taxes

Deferred taxes can be classified into two categories: deferred tax assets and deferred tax liabilities. Deferred tax assets represent future tax savings, while deferred tax liabilities represent future tax payments. Understanding the nature of these differences is crucial for managing them effectively using accounting software.
 

2. Set Up Your Accounting Software

The first step in using accounting software to manage deferred taxes is to set up your software correctly. This involves creating specific accounts for deferred tax assets and deferred tax liabilities. By creating separate accounts, you can easily track and monitor your deferred tax balances, ensuring accuracy in your financial statements.
 

3. Record Deferred Tax Entries

When a transaction results in a deferred tax, it's essential to record the appropriate journal entries in your accounting software. This involves debiting or crediting the relevant deferred tax asset or liability account and the corresponding income tax expense or income tax benefit account. Proper recording of deferred tax entries ensures that your financial statements accurately reflect your deferred tax positions.
 

4. Reconcile Deferred Taxes

Accounting software can help you reconcile your deferred tax accounts by comparing your financial statements' tax liabilities with your actual tax liabilities calculated based on tax regulations. Reconciliation helps identify any discrepancies and ensures that your deferred tax balances are accurate. Many accounting software solutions offer built-in reconciliation tools, simplifying this process and reducing the risk of errors.
 

5. Generate Tax Reports

Accounting software can generate comprehensive tax reports that provide valuable insights into your deferred tax positions. These reports can include information on the sources of deferred tax assets and liabilities, the current and non-current classification of deferred taxes, and the effective tax rate reconciliation. By regularly reviewing these reports, you can monitor your deferred tax balances and make informed decisions regarding tax planning and strategy.
 

6. Stay Updated on Tax Laws and Regulations

Tax laws and regulations are subject to change, and it's essential to stay updated on any revisions that may impact your deferred tax positions. Many accounting software solutions offer automatic updates to ensure compliance with the latest tax laws and regulations. Utilizing these updates can help you accurately manage and track your deferred taxes while minimizing the risk of non-compliance.
 

7. Monitor Deferred Tax Valuation Allowances

In some cases, you may need to establish a valuation allowance for deferred tax assets if it's more likely than not that some or all of the deferred tax assets will not be realized. Accounting software can help you track and monitor valuation allowances, ensuring that your financial statements accurately represent your deferred tax positions.

 

Managing and tracking deferred taxes can be a complex and time-consuming task, but leveraging accounting software can greatly simplify the process. By setting up your software correctly, recording deferred tax entries, reconciling deferred tax accounts, generating tax reports, and staying updated on tax laws, you can effectively manage and track your deferred taxes. This ensures accurate financial reporting, compliance with tax regulations, and informed decision-making regarding tax planning and strategy.