Applicable tax rates are enacted marginal tax rates for the reversal years. A reversal occurs in the periods in which the difference between the book basis and the tax basis of the deferred tax asset or liability decreases. The enacted marginal tax rate is the enacted rate expected to apply to the last dollars of taxable income in future periods in which deferred tax liabilities or assets are expected to be settled or recovered. Income tax payable is calculated using the current tax rate and taxable income for the current year. The illustration above for Dusto Co. relating to differences in depreciation for financial accounting income and taxable income was an example of a temporary difference giving rise to taxable amounts in future years and creating a deferred tax liability.
Temporary differences can also give rise to deductible amounts and deferred tax assets.
Let's look at two independent examples. Here an expense is recognized for book purposes before it is recognized for tax purposes. The amounts to be paid in 1999 and 2000 are deductible amounts. Let's compare Bosco's balance sheets for GAAP and tax purposes. The amounts earned per GAAP in 1999 and 2000 are deductible amounts.