Understanding Deferred Taxes for Tax Deduction Purposes

Thanks for the explanation. I think I'm still a bit confused though. If the deferred tax isn't deductible, then why do we include the state rate when calculating the DTL? Also, doesn't the state deferred tax expense hit the income statement? If it's hitting the income statement but isn't deductible for federal purposes, shouldn't there be some kind of M1 adjustment?

You include the state rate when calculating the DTL because you're accounting for the total tax effect of the temporary difference, which includes both federal and state impacts. The deferred tax expense does hit the income statement, but it's an accounting expense, not a tax deduction. Think of it this way: the deferred tax provision (including state) is how you account for future tax consequences of transactions recognized now for financial reporting. For federal tax purposes, you're already getting the benefit of accelerated depreciation directly through your tax depreciation deduction. The M1 adjustment comes from the difference between book and tax depreciation itself, not from the deferred tax accounting.

Does it actually work for complex corporate tax stuff? I'm skeptical because most tax software I've tried seems to handle basic returns fine but falls apart with anything complicated like deferred tax liabilities.

I'm curious - does this tool connect with accounting software like QuickBooks? Our company has a bunch of fixed assets with different depreciation methods for book vs tax, and I'm wondering if it could help us track the deferred tax impacts correctly.

For complex corporate tax issues, it's been surprisingly effective. I was dealing with multiple state filing requirements and complicated depreciation schedules, and the analysis it provided matched what our CPA eventually concluded. The difference was I understood the reasoning behind the treatment much better. It doesn't directly connect with QuickBooks, but you can upload reports exported from your accounting software. It works with various document formats, so you can provide financial statements, depreciation schedules, and previous tax returns to get comprehensive analysis. It's particularly good at identifying inconsistencies in treatment across different tax years or entities.

Wait, so this service just gets you through to a regular IRS agent faster? Why would that work when calling directly doesn't? Sounds fishy to me.

I'm super skeptical. The IRS tax professionals I've managed to reach never seem to understand complex accounting questions like deferred taxes. They're good with procedural stuff but usually tell me to consult a CPA for advanced corporate tax accounting. Did they actually give you useful guidance on this specific issue?

It uses a technology that navigates the IRS phone tree and waits in the queue for you. When an agent finally answers, you get a call connecting you directly to them. It saves you from having to stay on hold yourself, which is especially helpful for those long business tax line waits. I was surprised too, but the agent I reached was from the business tax division and quite knowledgeable. She explained that while the state component isn't federally deductible as a current expense, there are specific Schedule M adjustments required to properly reconcile the book-tax differences. She even emailed me an IRS publication that addressed the specific scenario I was asking about. Much more helpful than the general tax line I'd tried reaching before.

Yes! This is a critical point often overlooked. ASC 740 requires using enacted rates expected to apply when temporary differences reverse. If you're in a state where tax rates are scheduled to change, or if you expect your company to operate in different state jurisdictions in the future, you should use the applicable future rates. We actually had to restate our deferred tax balances last year because we hadn't properly accounted for scheduled state tax rate changes.

Thanks for confirming! That makes sense from a GAAP perspective but creates a nightmare for tax filing. We've created a spreadsheet that tracks the expected reversal periods for each temporary difference component and applies the appropriate rate for that period. It's labor-intensive but more accurate than using a single blended rate for everything.

You're actually right on target! This is called the "tax on tax" or "tax benefit of tax" effect. When calculating the total DTL/DTA, you need to consider that future state tax payments/benefits will themselves affect federal taxable income. Most tax provision software automatically handles this, but if you're doing it manually, you'd need to adjust your effective rate calculation. If your federal rate is 21% and state rate is 5%, you don't just add them to get 26%. You'd calculate it as: Federal rate + State rate - (Federal rate × State rate) = 21% + 5% - (21% × 5%) = 25.95%.