Which scenario could lead to both a Deferred Tax Asset (DTA) and a Deferred Tax Liability (DTL) existing at the same time?

Which scenario could lead to both a Deferred Tax Asset (DTA) and a Deferred Tax Liability (DTL) existing at the same time?

• A. A company has negative pre-tax income creating a DTA (NOL) while accelerated depreciation creates a DTL for earlier years
• B. Only a DTA exists
• C. Only a DTL exists
• D. Neither DTA nor DTL exists

Answer: (A)

Temporary differences between how income and expenses are recognized for books versus taxes can produce both a deferred tax asset and a deferred tax liability at the same time. A net operating loss carryforward creates a future tax benefit, so it shows up as a deferred tax asset. At the same time, using an accelerated depreciation method for tax purposes lowers current taxable income more than book depreciation, creating a timing difference that will reverse later and show up as a deferred tax liability. So it’s entirely possible for a company to have both a DTA from losses or other deductible timing differences and a DTL from depreciation timing differences in the same period. The other options describe situations with only one side or none, which wouldn’t reflect the coexistence of both types of timing differences.

Temporary differences between how income and expenses are recognized for books versus taxes can produce both a deferred tax asset and a deferred tax liability at the same time. A net operating loss carryforward creates a future tax benefit, so it shows up as a deferred tax asset. At the same time, using an accelerated depreciation method for tax purposes lowers current taxable income more than book depreciation, creating a timing difference that will reverse later and show up as a deferred tax liability. So it’s entirely possible for a company to have both a DTA from losses or other deductible timing differences and a DTL from depreciation timing differences in the same period. The other options describe situations with only one side or none, which wouldn’t reflect the coexistence of both types of timing differences.