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what is meant by decentralized application | decentralized applications are applications that are generally open source and use or facilitate blockchain and cryptocurrency transactions | |
what is the most popular decentralized application | cryptocurrency wallets like metamask are the most popular dapps followed by exchanges like uniswap and opensea gambling dapps like metawin are also very popular | |
is bitcoin a decentralized application | bitcoin is decentralized but it is not an application it is a blockchain network with a cryptocurrency used as a payment system and speculative investment the bottom linedecentralized applications dapps are digital applications or programs that run on a decentralized network rather than a single computer or server they are built on blockchain technology and use cryptocurrency as a means of exchange dapps are designed to be open source transparent and resistant to censorship they allow users to interact directly with the application without intermediaries dapps have the potential to disrupt traditional industries by allowing for peer to peer interactions and transactions without a central authority the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info | |
what is a decile | a decile is a quantitative method of splitting up a set of ranked data into 10 equally large subsections this type of data ranking is performed as part of many academic and statistical studies in the finance and economics fields the data may be ranked from largest to smallest values or vice versa a decile which has 10 categorical buckets may be contrasted with percentiles that have 100 quartiles that have four or quintiles that have five investopedia danie drankwaterunderstanding a decilein descriptive statistics a decile is used to categorize large data sets from the highest to lowest values or vice versa like the quartile and the percentile a decile is a form of a quantile that divides a set of observations into samples that are easier to analyze and measure while quartiles are three data points that divide an observation into four equal groups or quarters a decile consists of nine data points that divide a data set into 10 equal parts when an analyst or statistician ranks data and then splits them into deciles they do so in an attempt to discover the largest and smallest values by a given metric for example by splitting the entire s p 500 index into deciles 50 firms in each decile using the p e multiple the analyst will discover the companies with the highest and lowest p e valuations in the index a decile is usually used to assign decile ranks to a data set a decile rank arranges the data in order from lowest to highest and is done on a scale of one to 10 where each successive number corresponds to an increase of 10 percentage points in other words there are nine decile points the 1st decile or d1 is the point that has 10 of the observations below it d2 has 20 of the observations below it d3 has 30 of the observations falling below it and so on | |
how to calculate a decile | there is no one way of calculating a decile however it is important that you are consistent with whatever formula you decide to use to calculate a decile one simple calculation of a decile is d1 value of n 1 1 0 th data begin aligned text d1 text value of left frac n 1 10 right text th data end aligned d1 value of 10n 1 th data d2 value of 2 n 1 1 0 th data begin aligned text d2 text value of left frac 2 times n 1 10 right text th data end aligned d2 value of 102 n 1 th data d3 value of 3 n 1 1 0 th data begin aligned text d3 text value of left frac 3 times n 1 10 right text th data end aligned d3 value of 103 n 1 th data d9 value of 9 n 1 1 0 th data begin aligned text d9 text value of left frac 9 times n 1 10 right text th data end aligned d9 value of 109 n 1 th data from this formula it is given that the 5th decile is the median since 5 n 1 10 is the data point that represents the halfway point of the distribution deciles in finance and economicsdeciles are used in the investment field to assess the performance of a portfolio or a group of mutual funds the decile rank acts as a comparative number that measures the performance of an asset against similar assets for example say an analyst is evaluating the performance of a set of mutual funds over time a mutual fund that is ranked five on a decile scale of one to 10 means it s in the top 50 by splitting the mutual funds into deciles the analyst can review the best and worst performing mutual funds for a given time period arranged from the smallest to highest average return on investment the government also uses deciles to determine the level of income inequality in the country that is how income is distributed for example if the top 20 wage earners of a country of 50 000 citizens fall in the 10th decile and earn more than 50 of the total income in the country one can conclude that there is a very high degree of income inequality in that country in this case the government can introduce measures to decrease the wage gap such as increasing the income tax of the rich and creating estate taxes to limit how much wealth can be passed on to beneficiaries as an inheritance example of a decilethe table below shows the ungrouped scores out of 100 for 30 exam takers 485255575860616465666972737576788182848788909192939495969799using the information presented in the table the 1st decile can be calculated as let s calculate the 3rd decile | |
what would we get if we were to calculate the 5th decile | also notice how the 5th decile is also the median of the observation looking at the data set in the table the median which is the middle data point of any given set of numbers can be calculated as 76 78 2 77 median d5 at this point half of the scores lie above and below the distribution | |
what is decision analysis da | decision analysis da is a systematic quantitative and visual approach to addressing and evaluating the important choices that businesses sometimes face ronald a howard a professor of management science and engineering at stanford university is credited with originating the term in 1964 1 the idea is used by large and small corporations alike when making various types of decisions including management operations marketing capital investments or strategic choices understanding decision analysis da decision analysis uses a variety of tools to evaluate all relevant information to aid in the decision making process and incorporates aspects of psychology management techniques training and economics it is often used to assess decisions that are made in the context of multiple variables and that have many possible outcomes or objectives the process can be used by individuals or groups attempting to make a decision related to risk management capital investments and strategic business decisions a graphical representation of alternatives and possible solutions as well as challenges and uncertainties can be created on a decision tree or influence diagram more sophisticated computer models have also been developed to aid in the decision analysis process the goal behind such tools is to provide decision makers with alternatives when attempting to achieve objectives for the business while also outlining uncertainties involved and providing measures of how well objectives will be reached if final outcomes are achieved uncertainties are typically expressed as probabilities while frictions between conflicting objectives are viewed in terms of trade offs and utility functions that is objectives are viewed in terms of how much they are worth or if achieved their expected value to the organization despite the helpful nature of decision analysis critics suggest that a major drawback to the approach is analysis paralysis which is the overthinking of a situation to the point that no decision can be made in addition some researchers who study the methodologies used by decision makers argue that this type of analysis is not often utilized examples of decision analysisif a real estate development company is deciding on whether or not to build a new shopping center in a location they might examine several pieces of input to aid in their decision making process these might include traffic at the proposed location on various days of the week at different times the popularity of similar shopping centers in the area financial demographics local competition and preferred shopping habits of the area population all of these items can be put into a decision analysis program and different simulations are run that help the company make a decision about the shopping center as another example a company has a patent for a new product that is expected to see rapid sales for two years before becoming obsolete the company is confronted with a choice of whether to sell the patent now or build the product in house each option has opportunities risks and trade offs which can be analyzed with a decision tree that considers the benefits of selling the patent verses making the product in house within those two branches of the tree another group of decision trees can be created to consider such things as the optimal selling price for the patent or the costs and benefits of producing the product in house | |
what is a decision support system dss | a decision support system dss is a computerized program used to support determinations judgments and courses of action in an organization or a business a dss sifts through and analyzes massive amounts of data compiling comprehensive information that can be used to solve problems and in decision making typical information used by a dss includes target or projected revenue sales figures or past ones from different time periods and other inventory or operations related data understanding a decision support system dss a decision support system gathers and analyzes data synthesizing it to produce comprehensive information reports in this way as an informational application a dss differs from an ordinary operations application whose function is just to collect data the dss can either be completely computerized or powered by humans in some cases it may combine both the ideal systems analyze information and actually make decisions for the user at the very least they allow human users to make more informed decisions at a quicker pace one of the first data driven dss was developed at american airlines in the 1970s 1using a dssthe dss can be employed by operations management and other planning departments in an organization to compile information and data and synthesize it into actionable intelligence in fact these systems are primarily used by mid to upper level management for example a dss may be used to project a company s revenue over the upcoming six months based on new assumptions about product sales due to a large number of factors that surround projected revenue figures this is not a straightforward calculation that can be done manually however a dss can integrate all the multiple variables and generate an outcome and alternate outcomes all based on the company s past product sales data and current variables a dss can be tailored for any industry profession or domain including the medical field government agencies agricultural concerns and corporate operations characteristics of a dssthe primary purpose of using a dss is to present information to the customer in an easy to understand way a dss system is beneficial because it can be programmed to generate many types of reports all based on user specifications for example the dss can generate information and output its information graphically as in a bar chart that represents projected revenue or as a written report as technology continues to advance data analysis is no longer limited to large bulky mainframe computers since a dss is essentially an application it can be loaded on most computer systems whether on desktops or laptops certain dss applications are also available through mobile devices the flexibility of the dss is extremely beneficial for users who travel frequently this gives them the opportunity to be well informed at all times providing them the ability to make the best decisions for their company and customers on the go or even on the spot | |
what is a declaration of trust | a declaration of trust under u s law is a document or an oral statement appointing a trustee to oversee assets being held for the benefit of one or more other individuals these assets are held in a trust the document or statement also contains details of the trust s purpose its beneficiaries and how it will be managed by the trustee the declaration of trust is sometimes referred to as a nominee declaration understanding a declaration of trusta declaration of trust not only appoints a trustee but defines the trust to be created in considerable detail it identifies the assets held within the trust it states who will benefit from the trust and who can amend or revoke the trust as well as the name of the trustee and what powers the trustee holds the trustee may be a financial institution rather than an individual the statement may include instructions on how and when the beneficiary will receive distributions the declaration provides an overview of the trust s purpose or objectives and how the trustee may invest and manage assets to support the beneficiaries it also may explain who will replace the trustee in the event of illness incapacitation death or any other reason some states require a declaration of trust to be made in writing while others will permit oral declarations state laws also govern how a declaration of trust is applied to all those involved in the operation of the trust including grantors trustees and beneficiaries a declaration of trust has a different meaning in the u k there it establishes the joint ownership of a property that is being held for the benefit of one or more individuals other than the official owner it is governed by the trustee act of 2000 the u s and the u k have different definitions of the declaration of trust with a declaration of trust an individual may be regarded as the owner of a property even if that person is not designated as the owner in the land registry the trust itself can be cited in the land registry to show that the listed owner is not the sole owner of the property for example a person may purchase a home with a mortgage some of the money towards the purchase may come from the person s parents the parents would contribute towards the costs with the agreement that they will receive a share of any profit from the property s sale the person creating the declaration of trust would be the registered owner on the title deeds of the property but the parents can register their interests on the trust deed | |
what is the declining balance method | the declining balance method is an accelerated depreciation system of recording larger depreciation expenses during the earlier years of an asset s useful life the system records smaller depreciation expenses during the asset s later years investopedia xiaojie liu | |
how to calculate declining balance depreciation | depreciation under the declining balance method is calculated with this formula 1declining balance depreciation c b v d r where c b v current book value d r depreciation rate begin aligned text declining balance depreciation cbv times dr textbf where cbv text current book value dr text depreciation rate end aligned declining balance depreciation cbv drwhere cbv current book valuedr depreciation rate current book value is the asset s net value at the start of an accounting period it s calculated by deducting the accumulated depreciation from the cost of the fixed asset residual value is the estimated salvage value at the end of the useful life of the asset the rate of depreciation is defined according to the estimated pattern of an asset s use over its useful life the expense would be 270 in the first year 189 in the second year and 132 in the third year if an asset costing 1 000 with a salvage value of 100 and a 10 year life depreciates at 30 each year | |
what does the declining balance method tell you | the declining balance method is also known as the reducing balance method it s ideal for assets that quickly lose their value or inevitably become obsolete this is classically true with computer equipment cell phones and other high tech items that are generally useful earlier on but become less so as new models are brought to market an accelerated method of depreciation ultimately factors in the phase out of these assets employing the accelerated depreciation technique means there will be lesser taxable income in the earlier years of an asset s life 2the declining balance technique represents the opposite of the straight line depreciation method which is more suitable for assets whose book value drops at a steady rate throughout their useful lives the straight line depreciation method simply subtracts the salvage value from the cost of the asset and this is then divided by the useful life of the asset the annual straight line depreciation expense would be 2 000 15 000 minus 5 000 divided by five if a company shells out 15 000 for a truck with a 5 000 salvage value and a useful life of five years declining depreciation vs the double declining methodit may signal that a company is using accelerated depreciation methods such as the double declining balance depreciation method if it often recognizes large gains on sales of its assets net income will be lower for many years but this ultimately leads to a bigger gain when the asset is sold because book value ends up being lower than market value its sale could portray a misleading picture of the company s underlying health if the asset is still valuable | |
what is accumulated depreciation | accumulated depreciation is total depreciation over an asset s life beginning with the time when it s put into use depreciation is typically allocated annually in percentages 3 | |
how does depreciation affect taxes | depreciation allows a company to deduct an asset s declining value reducing the amount of income on which it must pay taxes the company must own the asset and use it to generate income its anticipated service life must be for more than one year and it must have a determinable useful life expectancy 4 | |
how does the double declining balance depreciation method work | the double declining method involves depreciating an asset more heavily in the early years of its useful life a business might write off 3 000 of an asset valued at 5 000 in the first year rather than 1 000 a year for five years as with straight line depreciation the double declining method depreciates assets twice as quickly as the declining balance method as the name suggests 5the bottom linea declining balance method accelerates depreciation so more of an asset s value can be recorded earlier in its useful life the flip side is that less of its value can be claimed in its later years this method is most suitable for assets and equipment that can be expected to become useless and obsolete within a few years such as technology products all methods of depreciation can affect a business s tax picture and taxes owed | |
what is decoupling | in financial markets decoupling occurs when the returns of one asset class diverge from their expected or normal pattern of correlation with others decoupling thus takes place when different asset classes that typically rise and fall together start to move in opposite directions such as one increasing and the other decreasing one example might be seen with oil and natural gas prices which typically rise and fall together 1 decoupling would happen if oil moves in one direction while natural gas moves in the opposite direction understanding decouplingin the investment realm investors and portfolio managers usually use a statistical measure known as correlation to determine the relationship between two assets or more the strength of the correlation between two assets depends on where the metric falls within the range of 1 to 1 where a higher number denotes a stronger sync between the investments being compared a correlation of 1 0 implies that the assets move in the opposite direction and 1 0 means that the assets will always move in the same direction by understanding which assets are correlated portfolio managers and investors create diversified portfolios by allocating investments that are not correlated with each other this way when one asset value falls the other investments in the portfolio don t have to follow the same path stocks in the same industry will usually have a high positive correlation and a fall in one company s share price will be accompanied by falls in others for example in 2017 goldman sachs released a report comparing the contemporary tech sector to the tech bubble of the late 90s according to that report the 2017 market was dominated the five faamg stocks facebook now meta apple amazon microsoft and google alphabet in a manner similar to the technology market just prior to the dotcom bubble the report resulted in a sell off that led to a fall in the stock price of most tech companies in the u s market since the entire tech sector was affected the collective plunge seemed to confirm that these companies were highly coupled a drop in one stock price meant a drop in all of them conversely decoupling occurs when the correlations between closely linked investments or commodities decrease for example gold prices are usually closely linked to the stock prices of mining companies if negative news is published that causes gold prices to fall but mining shares to increase that would be evidence that gold mining companies were decoupling from the price of gold in effect decoupling refers to a decrease in correlation decoupling of marketsmarkets and economies that once moved together can also be decoupled the financial crisis of 2008 that started in the u s economy eventually spread to most markets in the world leading to a global recession since the markets are coupled with the u s economic growth any market that moves opposite to the global trajectory is known as a decoupled market or economy in the aftermath of the recession the concept that the world s emerging markets no longer need to depend on u s demand to drive economic growth is an example of economic decoupling whereas emerging markets at one point relied on the u s economy many analysts now argue that some emerging markets such as china india russia and brazil have become sizable markets on their own for goods and services the argument for decoupling indicates that these economies would be able to withstand a faltering u s economy china for example gets almost 70 of its foreign direct investment fdi from other emerging countries in asia and is also investing heavily in commodity producing companies in its continent 3by racking up its foreign exchange reserves and maintaining a current account surplus the country has room to run a fiscal stimulus if a global downturn occurs thereby decoupling itself from the advanced markets decoupling vs recouplingin contrast to decoupling recoupling describes a situation of increasing correlation between two assets or markets usually after a period of temporary decoupling this might occur due to technological innovations that reduce the dependence of one factor on another another example might be found in the relationship between natural gas prices and crude oil two fossil fuels that play a key role in many industries between 1997 and 2009 the henry hub natural gas spot price closely tracked changes in west texas intermediate wti with only brief deviations 4 those prices then started decoupling most likely due to technological innovations that greatly increased the available supply of natural gas in later years the price of crude rose sharply while natural gas prices remained low they began to recouple starting in 2015 when crude prices fell and once again began to track the price of natural gas the two fuels are once again positively correlated although the price is lower than it was prior to 2009 special considerationsdecoupling can also refer to the relationships between non economic factors such as education health and human development a major goal of environmental economists is to decouple productive activity from environmental pressures in other words to achieve productive activity without causing environmental damage 2absolute decoupling is when two variables stop moving together the correlation between them becomes zero or negative relative decoupling is when the correlation between two variables decreases but remains positive economists also distinguish between different degrees of decoupling depending on the extent to which the correlation decreases absolute decoupling refers to circumstances in which two variables cease to move in the same direction in other words where the correlation between the two factors falls to zero or lower relative decoupling refers to a partial decoupling where the two factors continue to have a positive but lower correlation 5the bottom linea complex market economy has many moving parts and many of them move together decoupling is one of many economic terms used to describe the changing relationships between economic indicators stock prices and other features of the world economy | |
what is decoupling between the u s and china | the economies of china and the united states are closely linked thanks to the formers importance as a manufacturing hub and the latter s importance in the world financial system this close relationship can sometimes have negative consequences as a disruption in one country can cause a market downturn in the other for this reason some politicians have advocated policies that would decouple the two economies by favoring local industries | |
what is the customer order decoupling point | in logistics the customer order decoupling point is a link in the supply chain where information from individual customer orders enters the production and distribution process prior to the customer order decoupling point production decisions are typically aggregated based on historical data and forecasts of consumer demand after the decoupling point individual data and customer orders are introduced to increase efficiency in allocations | |
what is decoupling in sustainable development | the united nations sustainable development goals are a group of long term projects seeking to reduce economic reliance on environmentally destructive or harmful industrial practices 6 this includes several provisions for decoupling growth from resource generation i e exploring ways to achieve economic growth that do not deplete natural resources or cause environmental pressures 7 | |
what is utility rate decoupling | in energy regulation decoupling is a rate adjustment mechanism that changes the relationship between a utility s revenue and the amount of income it sells to the public this reduces the utility s incentive to increase sales as a method of raising revenue thereby reducing the volatility of consumer energy bills 8 | |
what is decreasing term insurance | decreasing term insurance is a type of renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate premiums are usually constant throughout the contract and reductions in coverage typically occur monthly or annually 1 terms range between 1 year and 30 years depending on the plan offered by the insurance company 2decreasing term life insurance is usually used to guarantee the remaining balance of an amortizing loan such as a mortgage or business loan over time it can be contrasted with level premium term insurance understanding decreasing term insuranceterm life insurance is a form of coverage that provides a death benefit for only a certain length of time 3 for instance a 20 year term life insurance policy would feature level premiums and the same death benefit over the course of its term decreasing term insurance instead features a declining death benefit over time along with decreasing premiums these amounts will be set to a schedule when the life insurance policy is purchased and may conform to a standard schedule or be customized between the insurer and the insured the theory behind decreasing term insurance holds that with age certain liabilities and the corresponding need for high levels of insurance decreases numerous in force decreasing term insurance policies take the form of mortgage life insurance which affixes its benefit to the remaining mortgage of an insured s home alone decreasing term insurance may not be sufficient for an individual s life insurance needs especially if they have a family with dependents affordable standard term life insurance policies offer the security of a death benefit throughout the life of the contract 4the payment structure is the primary way this type of insurance is different from regular term life the amount in the death benefit goes down unlike other forms of life insurance 5benefits of decreasing term lifethe predominant use of decreasing term insurance is most often for personal asset protection small business partnerships also use a decreasing term life policy to protect indebtedness against startup costs and operational expenses in the case of small businesses if one partner dies the death benefit proceeds from the decreasing term policy can help to fund continuing operations or retire the percentage of the remaining debt for which the deceased partner is responsible the security allows the business to guarantee commercial loan amounts affordably decreasing term insurance is a more affordable option than whole life or universal life insurance 5 the death benefit is designed to mirror the amortization schedule of a mortgage or other personal debt not easily covered by personal assets or income like personal loans or business loans decreasing term insurance allows a pure death benefit with no cash accumulation unlike for example a whole life insurance policy as such this insurance option has modest premiums for comparable benefit amounts to either a permanent or temporary life insurance decreasing term policies are sometimes required by certain lenders to guarantee that the loan will be repaid in the event that the borrower dies before the loan matures for instance a small business may borrow 500 000 from a bank to expand with 50 000 to be repaid each year for 10 years they may ask the business owner to take out a decreasing term policy beginning in the amount of 500 000 and also reducing by 50 000 each year for ten years example of decreasing term insurancefor example a 30 year old male who is a non smoker might pay a premium of 25 per month throughout the life of a 15 year 200 000 decreasing term policy customized to parallel a mortgage amortization schedule the monthly cost for the level premium decreasing term plan does not change as the insured ages the risk of the carrier increases this increase in risk warrants the declining death benefit a permanent policy with the same face amount of 200 000 could require monthly premium payments of 100 or more per month while some universal or whole life policies allow reductions of face amounts when the insured uses the policy for loans or other advances the policies frequently hold fixed death benefits who might benefit from decreasing term life insurance small businesses sometimes find it useful to protect indebtedness against startup costs and operational expenses for example if one partner dies the death benefit proceeds from the decreasing term policy can help to fund continuing operations or retire the percentage of the remaining debt for which the deceased partner is responsible the protection also allows the business to guarantee commercial loan amounts affordably | |
why might decreasing term life not be the best fit for me | the main drawback is the death benefit declining over time which is of course why it costs less than standard term life or other policies also should something happen down the road decreasing term life may not provide the coverage needed saving a few dollars in the short term may leave you uncovered should a future event occur | |
is decreasing life insurance cheaper than regular term | yes because as the death benefit decreases over time so too do the corresponding premiums 5 | |
what happens at the end of a decreasing term life policy | at the end of a decreasing term life policy it terminates along with the death benefit coverage 5 | |
what is a tax deductible | a tax deductible is an expense that an individual taxpayer or a business can subtract from adjusted gross income agi the deductible expense reduces taxable income and therefore reduces the amount of income taxes owed understanding deductiblestax deductibles serve as incentives provided by governments to encourage certain behaviors governments tend to want people do things that are deemed beneficial to individuals or society as a whole the purpose of tax deductibles is to reduce a taxpayer s taxable income ultimately lowering their tax liability if people do these things specific tax deductibles are discussed more but in general governments want to promote specific actions such as charitable giving investment in retirement savings homeownership education and healthcare payments the government wants people to engage in all of these as they contribute to economic growth social welfare and personal financial stability additionally tax deductibles can help individuals retain more of their hard earned income this also serves as the point of encouraging responsible financial planning individuals are incentivized via tax deductibles to continue earning wages and contributing a smaller amount of taxes that also contribute to society advantages and disadvantages of tax deductiblestax deductibles offer several advantages for individuals and businesses first they serve as powerful incentives for specific behaviors not only is there a financial incentive for the taxpayer but society can also benefit those help fostering economic growth social welfare and individual well being the entire purpose of tax deductibles is to provide financial relief by lowering taxable income by subtracting eligible expenses from their income taxpayers can effectively retain more of their earnings this had the added benefit of stimulating the economy as the taxpayer now has greater disposable income they can pump into the economy tax deductibles also have the benefit of promoting fairness and equity within the tax system it recognizes and accounts for individual circumstances and responsibilities for instance deductions for medical expenses acknowledge the financial burden of healthcare costs particularly for individuals with chronic illnesses or disabilities similarly deductions for business expenses incentivize entrepreneurship and innovation for those who may be creating jobs in your local community tax deductibles also have a number of downsides deductibles often contribute to complexity and inefficiency within the tax system the proliferation of various deductions each with its own eligibility criteria limits and rules can make tax compliance burdensome for taxpayers and businesses the complexity of tax deductibles can create opportunities for taxpayers to make many accidental tax errors though it overlaps with an advantage tax deductibles can exacerbate economic distortions by influencing individuals financial decisions for example deductions for mortgage interest may incentivize excessive borrowing for homeownership contributing to housing bubbles and financial instability similarly deductions for certain business expenses may encourage wasteful spending or tax avoidance strategies that prioritize deductions over genuine business growth or productivity last though the promotion of equity was an advantage tax deductibles can also exacerbate income inequality there are opportunities for tax deductibles to disproportionately benefit higher income individuals for instance think back to the mortgage interest deduction example this tax deductible only impacts those who have the financial security of owning a home therefore someone struggling to make rent payments may not receive this tax benefit deductibles incentivize desired behaviors fostering economic growth and welfare lower taxable income offers financial relief and stimulates spending deductions promote fairness by considering individual circumstances and responsibilities they encourage entrepreneurship and innovation while recognizing healthcare burdens deductibles can increase tax system complexity deductions influence financial decisions potentially distorting markets deductibles may worsen income inequality favoring higher earners complexity breeds errors burdening taxpayers and businesses standardized deduction vs itemized deductionu s individual taxpayers may use either the standard deduction or fill out a list of all of their deductible expenses depending on which results in a smaller taxable income whether a taxpayer uses the standard deduction or itemizes deductible expenses the amount is subtracted directly from adjusted gross income the vast majority of americans have taken the standard deduction since 2018 when that figure was nearly doubled while many allowable deductions were eliminated or capped 12itemizing deductible expenses rather than taking the standard deduction requires filing one more piece of paper a schedule a form used to record the various claimed deductions must be attached to the main tax form form 1040 or form 1040 sr 5the process requires a good deal of record keeping throughout the year including saving receipts or other proof of expenditures common itemized deductions include medical and dental expenses state and local taxes mortgage interest charitable contributions unreimbursed job expenses and certain miscellaneous deductions like investment expenses or casualty losses filers who take the standard deduction can file form 1040 6 those who are age 65 or older can use form 1040 sr it s nearly identical to form 1040 but with larger print business deductiblesbusiness deductibles are considerably more complex than individual deductibles and require a great deal more record keeping a business or self employed individual must list all of the income that was received and all of the expenses that were paid out in order to report the real profit of the business that profit is the gross taxable income of the business examples of ordinary business deductibles include payroll utilities rent leases and other operational costs additional deductibles include capital expenses such as depreciating equipment or real estate 78permissible deductibles vary by the structure of the business limited liability companies llcs and corporations differ in the types and amounts of deductions available to their owners 910the standard deduction nearly doubled with the tax cuts and jobs act of 2017 in the first year of the act s implementation 2018 about 90 of taxpayers used the standard deduction rather than itemizing deductions 1retirement contributionsthere are several types of retirement accounts that offer tax benefits including traditional iras 401 k s 403 b s or sep iras each type of account has its own eligibility requirements contribution limits and tax treatment the key point for this article is that contributions to certain retirement accounts can be tax deductible for example if you earn 50 000 in a year and contribute 5 000 to a traditional ira you can deduct the 5 000 from your taxable income the irs sets annual contribution limits for retirement accounts which can vary depending on the type of account and your age for example in 2024 the contribution limit for traditional and roth iras is 6 000 for individuals under age 50 and 7 000 for those age 50 and older due to catch up contributions employer sponsored retirement plans like 401 k s have higher contribution limits often determined by the plan s terms and irs regulations 11it s also important to note that the tax deductibility of contributions to retirement accounts may be subject to income limits and eligibility criteria for instance if you or your spouse are covered by a retirement plan at work the tax deduction for traditional ira contributions may be reduced or phased out at certain income levels 11 | |
what s the difference between tax credit and tax deduction | both tax credits and tax deductions can help taxpayers pay less in taxes but there are distinct differences between the two a tax credit is a straight subtraction from your tax bill for example a 10 tax credit will reduce your tax bill by 10 a tax deduction lowers your taxable income and therefore lowers the total amount you owe a tax deduction reduces your taxable income while a tax credit reduces your tax bill dollar for dollar 12 | |
how are tax deductibles calculated | all tax deductibles or the standard deduction are subtracted from your gross income in order to arrive at an adjusted gross income which is the amount that is subject to taxes 13taxpayers who itemize deductions rather than taking the standard deduction add a schedule a form to form 1040 this form is used to list the expenses being deducted 5 | |
what is the standard tax deduction | the standard deduction is a specific dollar amount that taxpayers may use to reduce their taxable income if they do not choose to itemize their deductible expenses | |
do tax deductions increase your refund | a tax deduction lowers your taxable income which reduces your total amount of taxes owed that can result in a refund if you overpaid taxes during the year | |
should i take the standard deduction | you should take the standard deduction or itemize deductions depending on which results in a lower tax bill you may have to estimate your allowable deductions at least roughly to figure that out also keep in mind that you have to maintain records and receipts of deductible expenses throughout the year in order to back up the numbers you enter on schedule a there may be some years when you have good reason to itemize your deductions for example if you have very high unreimbursed medical expenses for one year they could amount to tax savings greater than the standard deduction the bottom linea deductible is an expense that a taxpayer or business can subtract from adjusted gross income reducing thus the amount of taxes they owe the irs provides lists requirements and amounts of all available deductibles most taxpayers use the standard deduction when filing taxes which for 2024 is 14 600 for single taxpayers and married couples filing separately 29 200 for married couples filing jointly and 21 900 for heads of households 4taxpayers with very high deductible expenses may opt to itemize their deductibles in that case schedule a form must be attached to the main tax form | |
what is a deduction | a deduction is an expense that can be subtracted from a taxpayer s gross income in order to reduce the amount of income that is subject to taxation it lowers your taxable income for the year for example if you earn 50 000 in a year and make a 1 000 donation to charity during that year you are eligible to claim a deduction for that donation reducing your taxable income to 49 000 the internal revenue service irs often refers to a deduction as an allowable deduction taxpayers can itemize deductions which means taking individual deductions one by one based on their family situation charitable donations medical expenses and other individual financial actions taken throughout the year alternatively taxpayers can choose to take the standard deduction which is a set deduction based on tax filing status that is available to everyone understanding deductionstaxpayers in the united states have the choice of claiming the standard deduction or itemizing their deductions claiming the standard deduction is easier and requires less paperwork and record keeping taxpayers who take the standardized deduction do so on form 1040 of their tax return the standard deduction is a set amount based on tax filing status that reduces taxable income for the year 1the internal revenue service irs has revamped form 1040 which most taxpayers now use and retired the old 1040a and 1040ez forms 2an itemized deduction is an expense subtracted from adjusted gross income agi which reduces taxable income and therefore the amount of taxes owed taxpayers who itemize deductions must use schedule a form 1040 an attachment to the standard 1040 form and are required to fill in a list of their allowable deductions 3 taxpayers who itemize deductions must keep receipts to prove these deductions in case they are audited 4common itemized deductions include please consult a tax professional to determine whether a standard deduction or itemizing works for your financial situation taxpayers who itemize have substantial deductions that add up to more than the standard deduction if your itemized deductions would be less than your standard deduction you will save more money on your taxes if you take the standard deduction standard tax deductions in 2023 and 2024since the passage of the tax cuts and jobs act of 2017 tcja the standard deduction has increased over the years to help keep pace with rising prices or inflation below are the standard deductions for tax years 2023 and 2024 depending on tax filing status 67the current standard deductions are a significant upgrade from levels before the tax cuts and jobs act was passed for example in the 2017 tax year the standard deduction was 6 350 for single filers and 12 700 for married people filing jointly 8if you opt to claim the standard deduction there are still some itemized deductions you can claim on your income tax return including eligible student loan interest and tuition and fees 9deductions vs creditsa deduction is different from a tax credit which is subtracted from the amount of taxes owed not from your reported income 10there are both refundable and non refundable credits non refundable credits cannot trigger a tax refund but refundable credits can 11for example imagine that after reporting your income and claiming your deductions you owe 500 in income tax however you are eligible for a 600 credit if the credit is non refundable your tax bill is erased but you do not receive any extra money if the credit is refundable you receive a 100 tax refund some businesses qualify for business tax credits which offset or reduce a company s taxes owed to the federal government business tax credits are designed to encourage a particular behavior that benefits the overall economy such as upgrading a building or factory and investing in research while tax deductions reduce taxable income business tax credits reduce the taxes owed special considerationsbusiness owners have a much more involved process during tax time since they re taxed on business profits not business proceeds or revenue that means documenting their costs of doing business to subtract them from the gross proceeds revealing the taxable profits the process is the same for the smallest businesses to the largest corporations although the corporations at least have accounting departments to take care of the paperwork businesses are required to report all of their gross income and then deduct business expenses from it the difference between the two numbers is the business s net taxable income thus business expenses work in a way that is similar to deductions although the process of tracking expenses can be burdensome the total amount of these expenses can help reduce a company s taxable income substantially thus lowering the taxes owed if you are a sole proprietor or own another type of pass through business you may end up both deducting business expenses from your gross proceeds and either itemizing or taking the standard deduction from your total taxable income | |
what are tax deduction examples | examples of common tax deductions include mortgage interest contributions towards retirement plans student loan interest charitable contributions certain health expenses gambling losses and hsa contributions 10 | |
are tax deductions good | yes tax deductions are good because they lower your income and therefore the amount of taxes you owe for example if you had to pay 10 in taxes on your income and your income was 1 000 you would owe 100 in taxes however if you had a tax deduction of 200 that would lower your income to 800 and you would now owe 80 in taxes | |
what is the tax deduction for 2023 | the standard tax deduction for single filers is 13 850 in 2023 this is the same for married individuals filing separately for those married and filing jointly the deduction is 27 700 in 2023 for heads of households it is 20 800 in 2023 7for tax year 2024 the standard deduction increases to 14 600 29 200 and 21 900 respectively 6the bottom linea deduction is an expense that a taxpayer can use to reduce their gross income thereby reducing the overall taxes they pay the irs allows for a variety of deductions that individuals can use to reduce their gross income taxpayers are allowed to itemize their deductions or to take the standard deduction which is much larger now than in the past thanks to the tcja of 2017 it is best to consult a tax professional or financial advisor to see which method of deductions has the greatest benefit for your individual tax situation | |
what is a deed | a deed is a signed legal document that transfers ownership of an asset to a new owner deeds are most commonly used to transfer ownership of property or vehicles between two parties the purpose of a deed is to transfer a title the legal ownership of a property or asset from one person or company to another a deed to real property must be properly filed with the local government for its owner to be able to sell it refinance it or obtain a line of credit on it this task is usually undertaken by the property buyer s attorney or title insurance company understanding a deeda deed is a binding document in a court of law only after it is filed in the public record by a local government official who is tasked with maintaining documents the signing of a deed must be notarized some states also require witnesses if a deed is not written notarized and entered into the public record it may be referred to as an imperfect deed the document and the transfer of title are valid but the related paperwork may need to be on file with the register of deeds to avoid a delay if there is a legal challenge other types of documents that confer privileges comparable to deeds include commissions academic degrees licenses to practice patents and powers of attorney the register of deeds is available for public viewing and is usually maintained at the town county or state level types of deedsthere are many different types of deeds each of which serves a different purpose they are generally categorized in the following ways content requirements of a deedthe exact requirements vary from state to state but they are pretty basic in california for instance the property being transferred must be described adequately the grantor the person transferring title to the property and the grantee the person accepting title must be named 2the deed may be void if the grantor is found to be not mentally competent was signed by a minor or of course was forged a deed does not have to be filed with the local government in order to be valid but this routine step can avoid trouble and delay down the road if the deed is embroiled in a legal case or the property owner wants to sell the property deeds often have a precise and detailed description of the property being transferred this description typically includes the property s address boundaries lot number and any other relevant identifiers the more accurate this description can be the more reliable and helpful the deed will be deeds and considerationconsideration is a foundational concept in contract law it embodies the idea of value exchanged representing what each party gives up in the context of a deed consideration plays a pivotal role in signaling the seriousness and intention behind the transfer by including consideration in the deed both the grantor and grantee acknowledge that the transaction is not merely a gift a deed is closely tied to consideration as the combination of both cover many of the requirements for a legitimate transaction by stipulating consideration the parties demonstrate their mutual intent to enter into a binding agreement for the transfer of property this helps establish the transaction as a deliberate and consensual act rather than an accidental or involuntary transfer consideration also provides a benchmark for assessing the value of the property being transferred and the fairness of the transaction while a deed itself signals a transfer it doesn t evaluate or measure the nature of the transaction while consideration need not be precisely equivalent to the property s fair market value there are legal and tax implications if the transfer of a deed does not have consideration in some states a mortgage for a house entails the creation of a deed of trust a trustee holds the deed of trust until the loan for the property is paid in full deed limitationsa transfer of ownership can get muddled even when a perfected deed has been filed there could be a cloud on title for a variety of reasons false deeds or deeds that contain errors can be filed that require clearing up with the record keepers there also can be probate issues for example if the owner of a property passes away without defining in a will who should gain control of some property the heirs might challenge one another in court for the property title moreover conferring a title through a deed does not necessarily grant the new owners the right to use the property in any way they choose a deed may include restrictions on the owner s actions such as the rules imposed by a homeowner s association an individual who signs a deed for a parcel of land has a legal right to possess that land for example but may not be able to build a shooting range on it because of the potential risks it would pose in other cases the holder of the title to a piece of property may own the land but be unable to develop it for environmental reasons deed restrictions and covenantsdeed restrictions also known as restrictive covenants are limitations or conditions imposed on the use or development of a property these restrictions are typically outlined in the deed deed restrictions aim to preserve the integrity value and aesthetics of a property for example think about implications of selling a house there may be restrictions to respect the current state of a neighborhood common examples of restrictions that may be listed in the deed include prohibitions on building additional structures exterior modifications or how land can be used somewhat related to deed restrictions are deed covenants covenants refer to agreements or promises made by property owners to abide by certain rules or conditions these are more likely to be voluntary compared to restrictions generally speaking deed restrictions are typically tied to the property deed itself and may be a bit more specific in contrast covenants may be part of a larger set of community rules or agreements and may vary in their application and enforcement deed vs titlea deed and a title are not the same but they are inextricably linked | |
does a deed mean you own the house | a deed is proof that you are the owner of the house or other property you hold the title to that property | |
what is a deed of trust | a deed of trust is a real estate transaction that involves a lender such as a bank as well as a buyer and a seller it inserts a fourth party into the transaction a trustee usually a title company which receives an interest in the property if the buyer defaults on the payments the trustee can seize the property and sell it 5the deed of trust process is a substitute for a mortgage agreement and is used in many states 6 from the buyer s viewpoint it makes no difference you pay your mortgage or you lose the house | |
what is a deed in lieu | the term in full is a deed in lieu of foreclosure a homeowner facing the loss of the property for nonpayment of a mortgage may choose to just transfer the deed to the house to the lender rather than face the repercussions of foreclosure proceedings in a deed in lieu agreement the lender agrees to accept the property and release the borrower from any other payments of the debt 7 | |
how long is a deed valid for | it depends a deed of trust as noted above works the same as a mortgage and has a time limit in which the money loaned for the property must be repaid in full at that time the trustee should take care of the paperwork to replace it with another deed that transfers the title to the owner 8 unless a deed has an expiration date on it it doesn t expire the bottom linedeeds are legal documents that transfer ownership of real property from one party to another containing essential information such as property descriptions parties involved and consideration exchanged they serve as tangible evidence of property ownership rights and obligations | |
what is a deed of reconveyance | a deed of reconveyance is a document that transfers the title of a property from a mortgage lender to the borrower once the loan has been paid | |
how a deed of reconveyance works | a deed of reconveyance is issued to borrowers once a mortgage loan has been paid in full the document is created by the lender is notarized includes a legal description of the property and is recorded in the county where the property is located any title search completed on the property will show that the lien has been paid in full since the loan is satisfied the borrower is no longer at risk of foreclosure a deed of trust is an agreement between a home buyer and a lender and states that the home buyer will repay the loan and that the mortgage lender will hold the legal title to the property until the loan is fully paid | |
when homeowners refinance their homes with a new mortgage they also receive a deed of reconveyance showing that the previous mortgage has been paid since a new mortgage has been established in a refinancing situation | second mortgages or home equity loans give the lending institution a security interest in the home as the property often serves as collateral for that loan lenders can assert their rights to foreclose if a borrower defaults on these second loans the deed of reconveyance related to the first mortgage has no effect on the second loan nor protects the homeowner a deed of reconveyance differs from state to state or from lender to lender in states that use trust deeds rather than mortgages a third party known as a trustee will hold the mortgage on behalf of the lender some states use satisfaction of mortgage documents rather than a deed of reconveyance but these serve the same purpose | |
what s included in a deed of reconveyance | the deed of reconveyance will typically include example of deed of reconveyanceif an individual purchases a house and takes out a mortgage of 400 000 borrowing from a bank or mortgage lender the property will serve as collateral under the deed of trust once the loan is fully paid the lender will certify that the debt has been paid and create the deed of reconveyance usually within several weeks the deed of reconveyance will indicate that the mortgage loan is paid in full and show that the borrower has the title and full ownership of the property frequently asked questions | |
what is the difference between security interest and deed of reconveyance | the lender has a security interest in the home while the mortgage is outstanding and can foreclose on the borrower evict them and take possession of the home if the borrower defaults on the loan the deed of reconveyance proves that the lender no longer has a security interest in the home and the homeowner cannot be foreclosed upon by the lending institution and they can transfer the free and clear title of the property at any time | |
what if the deed of conveyance is not filed or filed improperly | if no deed of reconveyance is recorded or if it is recorded with errors with the record s office such as the local county courthouse it creates a title issue the deed of trust will remain a burden against the property and the homeowner may experience difficulties when trying to sell the home can a homeowner face foreclosure with a deed of conveyance even after a homeowner has received a deed of reconveyance they risk foreclosure by the local government if they don t make timely property tax payments this process can be initiated by written notice and without involving the court in states that recognize a nonjudicial foreclosure process a deed of reconveyance does not protect a homeowner with unpaid property taxes | |
what is the difference between conveyance and reconveyance | conveyance transfers ownership of property from one entity to another a deed is an instrument of conveyance describing the parties and the property being transferred a lender who holds title to the property must issue a deed of reconveyance to transfer the property title to the borrower the bottom linea deed of reconveyance is a document that transfers the title of a property to the borrower from the bank or mortgage holder once a mortgage has been satisfied it clears the lender from the title to the property the deed of reconveyance is completed and signed by the lender and filed with the local recording office such as the county courthouse | |
what is a deed of release | a deed of release is a legal document that removes a previous claim on an asset it provides documentation of release from a binding agreement a deed of release might be included when a lender transfers the title of real estate to the homeowner upon satisfaction of the mortgage a deed of release literally releases the parties from previous obligations | |
how do deeds of release work | a good way to understand how a deed of release works is to consider it in a situation that s common for many people homebuying most individuals purchase their homes with the help of a mortgage provided by a financial institution the bank providing the funds for the mortgage doesn t just lend the money in good faith it takes a legal claim against the house as collateral until the loan is paid off a mortgage deed of release is then created when the borrower meets all mortgage payment terms or makes a full prepayment to satisfy the loan the lender holds the title to the property until that time and is formally a lienholder of record on the property until full and final payment is made the title provides secured collateral for the loan payments for the life of the loan reducing the default risk for the lender 1the lending institution s legal counsel typically creates the deed of release when the loan has been satisfied it reports that the loan has been paid in full under the terms required it also states that the lien has been removed and the full title has been transferred to the homeowner the homeowner owns the asset free and clear after the title and deed of release are provided to her they are no longer subject to any terms or obligations of the lender the lending account is closed be sure to have the deed of release recorded with the same agency that recorded the original mortgage so you can be absolutely sure that any and all liens are removed types of deeds of releaseemployment agreements are another scenario where a deed of release might be used the document can free both the employer and the employee of any obligations that they had under their employment agreement in some cases a deed of release might give an employee a designated payment this can occur in the case of a severance package the deed of release can include the terms of the severance including payment and the length of time that payments will last following the release it might also identify confidential information that cannot be shared by the employee after termination or restraint clauses that prevent a departing employee from forming a similar business or soliciting customers or clients 1if you re presented with a deed of release in a workplace setting be sure to read it through carefully to ensure that you understand what you re agreeing to example of deed of releasethe most common example of a deed of release can occur when someone buys a home when you take out a mortgage to purchase property the property acts as collateral for the loan meanwhile the lender holds the lien on the home as the entity to which you owe money when you complete your mortgage terms and pay off the loan in full a mortgage deed of release can be created another example of a deed of release is associated with personal guarantees a personal guarantee means that you assume personal responsibility for a debt even if that debt is owed by a business entity that you own if you agree to end a personal guarantee whether the loan has been paid in full or not you could do so through a deed of release agreeing to a uniform commercial code ucc lien for a business loan creates a different set of legal and financial obligations from a personal guarantee 2it s possible to find sample deed of release forms online though you may pay a fee to download them it s also important to ensure that any deed of release form that you re using conforms to your state s legal guidelines for a release of deed contact the federal deposit insurance corp fdic if you ve failed to receive a deed of release because your lending bank failed and went into fdic receivership the fdic indicates that it can usually sort out the problem for you 3the regulator offers an interactive search tool that you can use to find out if your bank was acquired by the government through receivership | |
what is deep in the money | deep in the money is an option that has an exercise or strike price significantly below for a call option or above for a put option the market price of the underlying asset the value of such an option is nearly all intrinsic value and minimal extrinsic or time value deep in the money options have deltas at or close to 1 00 or 100 which means the price of the option is expected to increase or decrease nearly in unison with the change in market price of the underlying security deep in the money options can be contrasted with those deep out of the money which instead have no intrinsic value and also minimal extrinsic value these options have deltas close to zero understanding deep in the moneythe internal revenue service irs defines deep in the money options as either an option is usually said to be deep in the money if it is in the money itm by more than 10 so if a call option is deep in the money it means that the strike price is at least 10 less than the underlying asset or 10 higher for a put option for lower priced equities 5 or less may be the level necessary to be deep in the money the most important characteristic of this type of option is its considerable intrinsic value to calculate the value of a call option one must subtract the strike price from the underlying asset s market price for a put option you would add the strike price to the underlying asset price deep in the money options have a very high delta level meaning that the options will move nearly in lock step with the underlying asset as a call option moves deeper into the money its delta will approach 100 at this delta every point change of underlying asset price results in an equal simultaneous option price change in the same direction for this reason deep in the money options are an excellent strategy for long term investors especially compared to at the money atm and out of the money otm options investing in the option is similar to investing in the underlying asset except the option holder will have the benefits of lower capital outlay limited risk leverage and greater profit potential special considerationsdeep in the money options allow the investor to profit the same or nearly the same from a stock s movement as the holders or short sellers of the actual stock despite costing less to purchase than the underlying asset while the deep money option carries a lower capital outlay and risk they are not without risk because options have a limited lifespan unlike stocks the investor the buyer of the option needs the underlying stock to move in the desired direction higher for calls and lower for puts within the specified period to make a profit there is always the possibility that the stock will move in the opposite of the desired direction leading the option to lose value and even potentially fall otm in that case intrinsic value declines or completely disappears leaving only the premium which is at the mercy of time decay traders will often look to close out deep in the money options by exercising them early which is only allowed for american options european options can only be exercised when they expire doing so can help clean up a trader s options position while also capturing more favorable interest rates in the case of deep puts or dividends in the case of deep calls this is because owning a deep put is effectively the same as being short the stock but without being credited the short proceeds that can earn interest likewise being long a deep call is effectively the same as being long the stock but contract holders would not receive the dividends paid unless they owned the shares instead deep in the money examplesuppose an investor buys a may call option for stock abc with a strike price of 175 on jan 1 2019 the closing price for abc was 210 on jan 1 2019 and strike prices for may call options on the same day were 150 175 210 225 and 235 because the option term is more than 90 days the call option with a strike price of 150 two strikes less than 210 is a deep in the money option at the same time these options both probably have deltas somewhere in the high 0 90s investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal correction dec 24 2021 this article has been edited to clarify that the maximum possible delta value for an option is 1 00 sometimes called delta one or 100 delta | |
what is a default | default is the failure to make required interest or principal repayments on a debt whether that debt is a loan or a security individuals businesses and even countries can default on their debt obligations default risk is an important consideration for creditors investopedia nono floresunderstanding a defaulta default can occur on secured debt such as a mortgage loan secured by a house or a business loan that s secured by a company s assets the loan could go into default if the borrower fails to make timely payments and the asset or collateral that was used to secure it would be in jeopardy a company that s unable to make required coupon payments on its bonds would also be in default defaults can occur on unsecured debt as well such as credit card balances a default reduces the borrower s credit score and can limit their ability to borrow in the future defaulting on secured debt vs unsecured debtits lenders or investors may sue to recover the funds when an individual business or country defaults on a debt their recovery prospects will depend in part on whether the debt is secured or unsecured the bank may ultimately foreclose on a home that secures a mortgage if the borrower defaults on the mortgage the lender can repossess the vehicle if a borrower defaults on an auto loan these are examples of secured loans the lender has a legal claim to a particular asset that s acquired with a secured loan corporations in default on secured debt may file for bankruptcy protection to avoid forfeiture providing time for negotiations on a settlement with creditors a default can also occur on unsecured debt such as medical bills and credit card balances unsecured debt isn t backed by an asset but the lender still has a legal claim in the event of a default credit card companies often wait a few months before sending an account into default the debt would be charged off after six or more months without payments being made on an outstanding balance the lender would write it off as a loss and close the account on a debt that s been charged off the creditor may then sell the charged off debt to a collection agency which would then attempt to collect from the borrower a collection agency that buys a charged off unsecured debt can have a lien or judgment placed against the borrower s assets a judgment lien is a court ruling that gives creditors the right to take possession of a debtor s property if the debtor fails to fulfill contractual obligations 3 types of defaultsthere are technically three different legal types of delays or defaults in contractual or legal obligations particularly in civil law systems these concepts are important in determining liability and remedies in contractual disputes in civic law cases these three determine which party is at fault to what degree and what consequences should follow general implications of defaultingvery broadly speaking there s a handful of things that could happen if you default on a loan the following list depends not only on the type of loan you re defaulting on but your credit history net worth liquid assets and legal standing with your loan contract we ll look at more specific outcomes of defaulting on specific types of debt later defaulting on a student loanstudent loans are another type of unsecured debt defaulting on a student loan has the same consequences as failing to pay off a credit card affecting your credit score your credit rating and your future loan prospects those who default on federal student loans may also face wage garnishment your loan is officially delinquent when your payment is 90 days overdue it s reported to all three major credit bureaus so your credit rating will fall new credit applications may be denied or approved only at a higher interest rate that can be charged to riskier borrowers a bad credit rating can follow you in other ways potential employers and potential landlords often check the credit scores of applicants especially employees who will need a security clearance to perform the job the loan will end up in default if your payment is at least 270 days late about one third of all federal student loan borrowers have been in default at some point borrowers who don t enter a loan rehabilitation agreement with default resolution group at the department s office of federal student aid can eventually be subject to withholdings of tax refunds and other federal payments as well as garnishments of up to 15 of their take home pay you can enter the federal student loan rehabilitation program or use loan consolidation if your federal student loans are in default a good first step is to contact your lender as soon as you realize that you may have trouble keeping up with your payments the lender may be able to work with you on a more attainable repayment plan or help you obtain deferment or forbearance on your loan payments student loan payments and the accumulation of interest on outstanding loans were suspended by the department of education doe as a covid 19 relief measure the doe then extended the pause on federal student loan payments in november 2022 in response to a federal court order blocking the white house s student loan forgiveness plan student loan payments were scheduled to resume 60 days after the department was permitted to implement the program or the litigation was resolved student loan interest charges then resumed on sept 1 2023 and payments restarted in october 2023 sovereign defaultsovereign default occurs when a country doesn t repay its debts a country that s in default usually cannot be compelled to satisfy its obligations by a court unlike an individual or corporate debtor but it does face a variety of other risks and problems the economy might go into recession or the currency might devalue the defaulting country may be shut out of debt markets for years to come sovereign default can occur for a variety of reasons including political unrest economic mismanagement or a banking crisis greece defaulted on a 1 73 billion payment to the international monetary fund imf in 2015 before securing additional debt relief from the european union fitch a leading provider of credit ratings downgraded the u s credit rating from aaa to aa on aug 1 2023 it indicated that it foresees fiscal deterioration over the next three years and cited the federal government s tendency for last minute negotiations over the country s debt ceiling the u s budget committee has indicated that this is only the second time in the nation s history that a credit rating provider has taken this action defaulting on a futures contractdefaulting on a futures contract occurs when one party doesn t fulfill the obligations set forth by the agreement default usually involves a failure to settle the contract by the required date in this case a futures contract is a legal agreement for a future transaction involving a particular commodity or asset one party to the contract agrees to buy at a specific date and price and the other party agrees to sell at the contract specified milestones they could face collections actions and lawsuits if one party defaults a default will stay on your credit reports and be factored into your credit score for seven years according to the credit bureau experian | |
what happens when you default on a loan | if you can t make your loan payment that doesn t necessarily mean you have to default there s a handful of options and alternatives you might be able to secure real world examplebed bath beyond once a major retail chain in the united states specializing in home goods filed for chapter 11 bankruptcy protection on april 23 2023 this filing came after years of declining sales mismanagement and failed turnaround attempts the company had been struggling for several years facing intense competition from online retailers like amazon and other big box stores the covid 19 pandemic further exacerbated its problems as it did for many brick and mortar retailers in the lead up to its bankruptcy filing bed bath beyond defaulted on a significant portion of its debt in january 2023 the company warned that it was considering filing for bankruptcy protection due to its inability to repay its outstanding loans at the time of its bankruptcy filing the company listed its assets at 4 4 billion and liabilities at 5 2 billion thus the company did not have enough assets on hand to pay its debt and therefore defaulted on loans | |
what happens when you default on a payment | your account is ultimately sent to a debt collection agency that tries to recover your outstanding payments when you default on a loan defaulting on any payment will reduce your credit score impair your ability to borrow money in the future lead to charged fees and possibly result in the seizure of your personal property | |
how long does a default stay on your credit report | defaults stay on your credit report for seven years a default may be removed earlier if it can be proven that it was a mistake your credit score should improve after the default is removed | |
what is an example of a default | a default is a missed payment or multiple missed payments on money that you ve borrowed an example of a default would be not paying your credit card bill or your monthly mortgage payment the bottom linedefault is the failure to make required interest or principal repayments on debt individuals businesses and countries can default on debt obligations failure to meet payments on a mortgage student loan or personal loan will affect an individual s credit rating their ability to secure future loans and could result in the seizure of property or wages corporations can default by failing to meet coupon payments on bonds sovereign default occurs when a country doesn t repay its debts | |
what is the default rate | the default rate is the percentage of all outstanding loans that a lender has written off as unpaid after a prolonged period of missed payments the term default rate also called penalty rate may also refer to the higher interest rate imposed on a borrower who has missed regular payments on a loan an individual loan is typically declared in default if payment is 270 days late defaulted loans are typically written off from an issuer s financial statements and transferred to a collection agency the default rate of banks loan portfolios in addition to other indicators such as the unemployment rate the rate of inflation the consumer confidence index the level of personal bankruptcy filings and stock market returns among others is sometimes used as an overall indicator of economic health understanding the default ratedefault rates are an important statistical measure used by lenders to determine their exposure to risk if a bank is found to have a high default rate in their loan portfolio they may be forced to reassess their lending procedures in order to reduce their credit risk the possibility of a loss resulting from a borrower s failure to repay a loan or meet contractual obligations the default rate is also used by economists to evaluate the overall health of the economy standard poor s s p and the credit reporting agency experian jointly produce a number of indexes that help lenders and economists track movements over time in the level of the default rate for various types of consumer loans including home mortgages car loans and consumer credit cards collectively these indexes are referred to as the s p experian consumer credit default indexes specifically these are the names of the indexes s p experian consumer credit default composite index s p experian first mortgage default index s p experian second mortgage default index s p experian auto default index and s p experian bankcard default index the s p experian consumer credit default composite index is the most comprehensive of these indexes because it includes data on both first and second mortgages auto loans and bank credit cards as of january 2020 the s p experian consumer credit default composite index reported a default rate of 1 02 its highest rate in the previous five years was in mid february 2015 when it reached 1 12 bank credit cards tend to have the highest default rate which is reflected in the s p experian bankcard default index the default rate on credit cards was 3 28 as of january 2020 a default record stays on the consumer s credit report for six years even if the amount is eventually paid lenders do not get overly concerned with missed payments until the second missed payment period is passed when a borrower misses two consecutive loan payments and is thus 60 days late in making payments the account is considered delinquent and the lender reports it to the credit reporting agencies delinquency describes a situation wherein an individual with a contractual obligation to make payments against a debt such as loan payments or any other kind of debt does not make those payments on time or in a regular timely manner the delinquent payment is then recorded as a black mark on the borrower s credit rating the lender may also increase the borrower s interest rate as a penalty for late payment if the borrower continues to miss payments the lender will continue to report the delinquencies up until the loan is written off and declared to be in default for federally funded loans such as student loans the default timeframe is approximately 270 days the timetable for all other loan types is established by state laws default on any kind of consumer debt damages the borrower s credit score which may make it difficult or impossible to get credit approval in the future the credit card accountability responsibility and disclosure card act of 2009 created new rules for the credit card market notably the act prevents lenders from raising a card holder s interest rate because a borrower is delinquent on any other outstanding debt in fact a lender can only begin charging a higher default rate of interest when an account is 60 days past due | |
what is default risk | default risk is the risk a lender takes that a borrower will not make the required payments on a debt obligation such as a loan a bond or a credit card lenders and investors are exposed to default risk in virtually all forms of credit offerings a higher level of default risk typically requires the borrower to pay a higher interest rate | |
how default risk is determined | whenever a lender extends credit to a borrower there is a chance that the loan or some portion of it will not be paid back default risk is the probability of this happening default risk can apply both to individuals and to companies that borrow money through loans or by issuing bonds lenders take default risk into account when deciding whether to make a loan and in how they determine your interest rate investors consider default risk in deciding whether to buy a company s or a government s bonds and whether the interest rate they re being offered is sufficient compensation for the risk default risk can be gauged using standard measurement tools including fico credit scores for consumers and independent credit ratings for corporate and government debt issues credit ratings for debt issues are provided by rating organizations such as standard poor s s p moody s and fitch ratings in terms of corporate debt default risk can change as a result of broader economic forces as well as changes in that particular company s financial situation an economic recession for example can impact the revenues and earnings of many companies influencing their ability to make interest payments on their debt and ultimately to repay the debt entirely companies may also face factors such as increased competition and lower pricing power resulting in a similar financial impact measuring a company s default risklenders generally examine a company s financial statements and employ several financial ratios to determine the likelihood of debt repayment free cash flow for example is the cash that is calculated by subtracting capital expenditures from operating cash flow companies use their free cash flow for purposes such as debt and dividend payments a free cash flow figure that is near zero or negative indicates that the company may be having trouble generating enough cash to deliver on its promised payments this could indicate a higher default risk a company s interest coverage ratio is another way to assess its default risk it is calculated by dividing a company s earnings before interest and taxes ebit by its periodic debt interest payments a higher ratio suggests that there is enough income being generated to cover interest payments which could indicate a lower default risk this measure reflects a high degree of conservatism taking into account non cash expenses such as depreciation and amortization to assess coverage based purely on cash transactions the interest coverage ratio can also be calculated by dividing earnings before interest taxes depreciation and amortization ebitda by periodic debt interest payments rating agencies like those mentioned above evaluate corporations and corporate debt such as bonds to help gauge default risk the scoring systems they use group debt into two major categories investment grade debt and non investment grade or speculative debt sometimes called high yield or junk investment grade debt is considered to have lower default risk and is generally more sought after by investors investment grade debt comes in varying levels of risk which the rating agencies distinguish with letter grades the higher the grade the lower the interest rate the company may have to pay to borrow conversely non investment grade debt offers higher yields than safer bonds or other debt but it also comes with a significantly higher chance of default while the grading scales used by the rating agencies are slightly different most debt is graded similarly for example any bond issue given an aaa aa a or bbb rating by s p is considered investment grade anything rated bb and below is considered speculative 1in august 2023 fitch ratings downgraded the long term ratings of the united states to aa from aaa due to the anticipated fiscal deterioration over the next three years increasing government debt burden and the erosion of governance related to aa and aaa rated peers over the last two decades that has resulted in multiple debt limit standoffs and 11th hour resolutions 2measuring an individual s default riskcredit bureaus collect information on consumers which they sell to prospective lenders and other interested parties in the form of credit reports that data is supplied to the bureaus by the individual s current and previous lenders such as banks and credit card issuers and shows how reliable they have been in paying their bills on time the assumption is that a consumer who has established a reliable record of paying their bills is less likely to be risky in the future than one whose record is more spotty information such as past bankruptcies can also be included in credit reports the information in your credit report is used to calculate a three digit credit score lenders use it as one measure of a consumer s default risk credit scores are based on a number of factors with bill payment history being the most highly weighted another key factor is your credit utilization ratio that s the amount debt you have outstanding at any given time compared to your total available credit for example if you have two credit cards with credit limits totaling 20 000 and you owe 10 000 on them your credit utilization ratio is 50 that s relatively high credit scores penalize ratios over 30 and the lower the better 3most credit scores range from 300 to 850 a fico credit score over 670 is considered good lower scores will generally mean higher interest rates if the borrower can get a loan or credit card at all higher scores often lead to lower interest rates and larger credit limits 4 | |
how does default affect your ability to get credit in the future | defaulting on a debt makes an individual or company considerably less attractive to prospective lenders it may be impossible for them to borrow again anytime soon except at exorbitant interest rates and maybe not even then in the case of individuals a default can remain on your credit report and have a negative effect on your credit score for up to seven years 5 | |
what is the difference between default and delinquency | debt becomes delinquent when you have failed to make a single on time payment default occurs after a series of delinquent payments the number of which can vary by type of loan and lender both are best avoided but default has worse consequences for your credit history the bottom linelenders and investors use various measures to determine the likelihood than an individual a company or a government will default on debts the greater the odds of default the more that the lender or investor will expect be compensated in terms of higher interest rates | |
what is defeasance | defeasance is a provision in a contract that voids a bond or loan on a balance sheet when the borrower sets aside cash or bonds sufficient enough to service the debt the borrower sets aside cash to pay off the bonds therefore the outstanding debt and cash offset each other on the balance sheet and do not need to be recorded investopedia jake shibreaking down defeasancein the broadest sense defeasance is any provision that nullifies the agreement in which it is contained the provision includes various requirements that must be met most often by the buyer before the seller is required to release his interest in a particular property defeasance entails a borrower setting aside sufficient funds often in cash and bonds to cover his or her associated debts this functions as a way to render the debt obligation null and void without the risk of prepayment penalties since the amounts owed and the amounts set aside offset they are functionally removed from balance sheet as monitoring the accounts is generally unnecessary example of defeasanceone area where defeasance is used is with commercial real estate purchases unlike home mortgages commercial loans may have significant prepayment penalties due to the obligations to bondholders with a stake in the commercial mortgage backed security cmbs that contains the loan prepayment can be a problem in these situations because investors expect a certain number of interest payments to generate revenue if a borrower pays early they lose that future money so to avoid this some bonds and loans have a prepayment penalty written in to avoid penalties but functionally complete an early payoff the commercial property buyer can build a portfolio with an equal value to the remaining obligations the most common securities within these portfolios are high quality bonds with a yield that covers the interest rate associated with the loan this construct allows bondholders to continue receiving payments and allows the borrower to functionally pay the loan off early creating defeasance accountsthe process of defeasance is generally considered complex and is rarely undertaken solely by the borrower often a variety of lawyers and financial experts are necessary to ensure the portfolio is properly structured and supplies the fund s need to offset the debt owed this is similar to liability matching used by pension fund experts where the future income stream associated with current securities matches the future payments needed to be made the defeasance clauseas part of a mortgage agreement the defeasance clause provides the borrower the right to secure the title or deed for the property once the debt is paid in full prior to that time the financial institution backing the loan has all rights to the title as it functions as collateral for the associated debt similar arrangements also exist with a variety of other large scale financed purchases this includes most vehicle loans once the debt is paid in full the financing company terminates its interest in the property and subsequently releases the property to the buyer | |
what is the defensive interval ratio dir | the defensive interval ratio dir also called the defensive interval period dip or basic defense interval bdi is a financial metric that indicates the number of days that a company can operate without needing to access noncurrent assets long term assets whose full value cannot be obtained within the current accounting year or additional outside financial resources alternatively this can be viewed as how long a company can operate while relying only on liquid assets the dir is sometimes viewed as a financial efficiency ratio but is most commonly considered a liquidity ratio understanding the defensive interval ratio dir the dir is considered by some market analysts to be a more useful liquidity ratio than the standard quick ratio or current ratio due to the fact that it compares assets to expenses rather than comparing assets to liabilities the dir is commonly used as a supplementary financial analysis ratio along with the current or quick ratio to evaluate a company s financial health since there can be substantially different dir and quick or current ratio values if for example a company has a large number of expenses but little or no debt the dir is called the defensive interval ratio because its calculation involves a company s current assets which are also known as defensive assets defensive assets consist of cash cash equivalents such as bonds or other investments and other assets that can readily be converted to cash such as accounts receivables for example if a company has 100 000 cash on hand 50 000 worth of marketable securities and 50 000 in accounts receivables it has a total of 200 000 in defensive assets if the company s daily operational expenses equal 5 000 the dir value is 40 days 200 000 5 000 of course a higher dir number is considered good as not only does it show that a company can rely on its own finances but it also provides a company with enough time to evaluate other meaningful options in paying its expenses that being said there is no specific number that is considered the best or right number for a dir it is often worth comparing the dir of different companies in the same industry to get an idea of what is appropriate which would also help determine which companies could be better investments formula for the defensive interval ratio dir the formula for calculating the dir is dir expressed as number of days current assets daily operational expenses | |
where | current assets cash marketable securities net receivablesdaily operational expenses annual operating expenses noncash charges 365advantages of the defensive interval ratio dir the dir is a helpful tool in evaluating a company s financial health because it provides a real world metric in number of days in this fashion a company knows exactly how long it can carry on business by meeting daily operational expenses without running into any financial difficulty that would likely require it to access additional funds through either new equity investment a bank loan or the sale of long term assets this is extremely important in managing its financial health as it can manage its balance sheet before having to take on unwanted debt in that respect it can be considered a more useful liquidity measure to examine than the current ratio which while providing a clear comparison of a company s assets to its liabilities does not give any definitive indication of how long a company can function financially without encountering significant problems in terms of simple day to day operations | |
what is a defensive stock | a defensive stock provides consistent dividends and stable earnings regardless of the overall state of the stock market there s a constant demand for these companies products so they tend to be more stable during the various phases of the business cycle defensive stocks shouldn t be confused with defense stocks which are the stocks of companies that manufacture things like weapons ammunition and fighter jets understanding defensive stocksinvestors who seek to protect their portfolios during a weakening economy or periods of high volatility may increase their exposure to defensive stocks well established companies such as procter gamble pg johnson johnson jnj philip morris international pm and coca cola ko are considered to be defensive stocks these companies have strong cash flows and stable operations with the ability to weather weakening economic conditions they also pay dividends and this can have the effect of cushioning a stock s price during a market decline defensive stocks are less likely to face bankruptcy because of their relative strength during downturns | |
why would anyone want to own a stock in difficult times or if things are getting shaky why not just go for the safety of a treasury bill which essentially has a risk free rate of return the answer is that fear and greed can often drive the markets | defensive stocks accommodate greed by offering a higher dividend yield than can be made in low interest rate environments they also alleviate fear because they re not as risky as regular stocks it usually takes a significant catastrophe to derail their business model most investment managers have no choice but to own stocks they ll migrate toward defensive stocks if they think times are going to be harder than usual defensive stocks tend to perform better than the broader market during recessions but they often perform below the market during an expansion phase due to their low beta or market related risk defensive stocks typically have betas of less than 1 0 1consider a stock with a beta of 0 5 the stock could be expected to lose only about 1 if the market drops 2 in a week but a 2 price gain in the market for one week leads to an expected increase of just 1 for a defensive stock with a beta of 0 5 advantages of defensive stocksdefensive stocks offer the substantial benefit of similar long term gains but lower risk than other stocks they have a higher sharpe ratio as a group than the stock market has as a whole that s a strong argument that defensive stocks are objectively better investments than other stocks 2warren buffett became one of the greatest investors of all time in part by focusing on defensive stocks it s not necessary to take excessive risks to beat the market limiting losses with defensive stocks may be more effective disadvantages of defensive stockson the downside the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market many investors abandon defensive stocks out of frustration with underperformance late in a bull market and this is when they need them the most investors sometimes rush into defensive stocks after a downturn in the market even though it s too late these failed attempts at market timing using defensive stocks can significantly lower the rate of return for investors examples of defensive stocksdefensive stocks are also known as noncyclical stocks because they re not highly correlated with the business cycle there are a few types of defensive stocks water gas and electric utilities are examples of defensive stocks because people need them during all phases of the business cycle utility companies also get another benefit from a slower economic environment because interest rates tend to be lower companies that produce or distribute consumer staples or goods that people tend to buy out of necessity are generally thought to be defensive they include food beverages hygiene products tobacco and certain household items consumers will find a way to buy them regardless of economic conditions these companies generate steady cash flow and predictable earnings during both strong and weak economies their stocks tend to outperform nondefensive or consumer cyclical stocks that sell discretionary products during weak economies while underperforming them in strong economies shares of major pharmaceutical companies and medical device makers have historically been considered defensive stocks there will always be sick people in need of care however they aren t as defensive as they once were due to increased competition from new drugs and uncertainty surrounding regulations apartment real estate investment trusts reits are also deemed to be defensive because people always need shelter but steer clear of reits that focus on ultra high end apartments when you re looking for defensive plays you might also want to avoid office building reits and industrial park reits that could see defaults on leases rise when business slows | |
what are dividends and how are they paid | dividends are a shareholder s portion of a company s earnings they re often paid quarterly in cash or as additional stock dividends aren t guaranteed they may be negligible or nonexistent if the company experiences a rock bottom quarter financially 3 | |
when does a poor economy become a recession | an official u s recession requires a declaration by experts at the national bureau of economic research nber it can t be an arbitrary opinion recessions can t be recognized until the country has experienced two back to back quarters of negative gross domestic product growth rates 4 | |
why are treasury bills considered risk free | treasury bills are issued by the united states department of the treasury you re effectively loaning money to the u s government when you purchase a treasury bill and the government pays you interest on that loan treasury bills are also referred to as t bills they re backed by the full faith and credit of the u s government 5the bottom linedefensive stocks provide stable consistent earnings and dividends they re less susceptible to factors that affect the rest of the stock market they re much less risky but gains aren t likely to be as substantial particularly during bull markets this isn t to say that you should avoid them entirely but you might want to talk to an investment advisor about balancing your portfolio with other stocks the comments opinions and analyses expressed on investopedia are for informational purposes online read our warranty and liability disclaimer for more info | |
what is a deferment period | the deferment period is a time during which a borrower does not have to pay interest or repay the principal on a loan the deferment period also refers to the period after the issue of a callable security during which the issuer can not call the security the duration of a deferment period can vary and is established in advance usually by a contract between the two parties a student loan deferment for example is usually for up to three years while many municipal bonds have a deferment period of 10 years understanding deferment periodsthe deferment period applies to student loans mortgages callable securities some types of options and benefit claims in the insurance industry borrowers should be careful not to confuse a deferment period with a grace period a grace period is a length of time after a due date that a borrower can make a payment without incurring a penalty grace periods are usually short windows of time such as 15 days when a borrower can make a payment beyond the due date without the risk of late fees or cancellation of the loan or contract deferment periods are usually longer time frames such as years in most cases deferments are not automatic and borrowers will need to apply to their lender and receive approval for a deferment deferment period on student loansthe deferment period is common with student loans that borrowers take out to pay for educational expenses the lender of a student loan may grant the deferment while the student is still in school or just after graduation when the student has few resources to repay the loan the lender may also grant deferment at their discretion during other periods of financial hardship to provide the borrower with temporary relief from debt payments and as an alternative to default 1during a loan s deferment period interest may or may not accrue borrowers should check their loan terms to determine whether a loan deferment means they will owe more interest than if they did not defer the payment for most subsidized deferred student loans interest does not accrue however interest does accrue on unsubsidized deferred student loans additionally the lender will capitalize the interest meaning that the interest is added to the amount due at the end of the deferment period 2deferment period on mortgagesusually a newly established mortgage will include a deferment of the first payment for example a borrower who signs a new mortgage in march may not have to start making payments until may forbearance of a mortgage differs from a deferment forbearance is an agreement negotiated between the borrower and the lender to temporarily postpone mortgage payments rather than having a property go into foreclosure lenders are more likely to grant forbearance to those borrowers who have a good history of making payments 3deferment period on callable securitiesdifferent types of securities may have an embedded call option allowing the issuer to buy them back at a predetermined price before the maturity date these securities are referred to as callable securities an issuer will typically call bonds when prevailing interest rates in the economy drop providing an opportunity for the issuer to refinance its debt at a lower rate however since early redemption is unfavorable to bondholders who will stop receiving interest income after a bond is retired the trust indenture will stipulate a call protection or a deferment period the deferment period is the period of time during which an issuing entity cannot redeem the bonds the issuer cannot call the security back during the deferment period which is uniformly predetermined by the underwriter and the issuer at the time of issuance 4deferment period on optionseuropean options have a deferment period for the life of the option this means they can be exercised only on the expiry date another type of option called the deferment period option has all the characteristics of an american vanilla option the option can be exercised anytime before it expires however payment is deferred until the original expiration date of the option deferment period in insurancebenefits are payable to the insured when they become incapacitated and are unable to work for a period of time the deferred period is the period of time from when a person has become unable to work until the time that the benefit begins to be paid it is the period of time an employee has to be out of work due to illness or injury before any benefit will start accumulating and any claim payment will be made 5example of a deferment perioda bond issued with 15 years to maturity may have a deferment period of six years this means investors are guaranteed periodic interest payments for at least six years after six years the issuer may choose to buy back the bonds depending on interest rates in the markets most municipal bonds are callable and have a deferment period of 10 years | |
do all student loans eligible for a deferment period | not all most federally administered loans have a deferment option available but if you have private loans this option is not required many private student loan companies do have deferment options but there is no requirement 6 | |
does interest still accrue during deferment | yes while you may not have to make payments which typically include both interest and principal the interest will continue to accrue leaving you with an ever increasing balance | |
how long can deferment on student loans last | deferment on a federal student loan can last up to three years the bottom linedeferment can mean various things depending on the context if you have a student loan and are struggling to pay it deferment may give you some much needed breathing room deferment on callable securities ensures stable interest payments for a set period of time in both situations deferments can be used to better your financial position | |
what are deferred acquisition costs dac | deferred acquisition costs dac is an accounting method that is applicable in the insurance industry using the dac method allows a company to defer the sales costs that are associated with acquiring a new customer over the term of the insurance contract understanding deferred acquisition costs dac insurance companies face large upfront costs when issuing new business including referral commissions to external distributors and brokers underwriting and medical expenses often these costs can exceed the premiums paid in the early years of different types of insurance plans the implementation of dac enables insurance companies to spread out these large costs that otherwise would be paid upfront gradually as they earn revenues using this accounting method tends to produce a smoother pattern of earnings as of 2012 insurers are required to comply with a new federal accounting standards board fasb rule accounting for costs associated with acquiring or renewing insurance contracts or asu 2010 26 fasb allows insurance companies to capitalize on the costs of acquiring new customers by amortizing them over time with this process dacs are recorded as assets rather than expenses and they can be paid off gradually deferred acquisition costs dac are treated as an asset on the balance sheet and amortized over the life of the insurance contract the fasb also requires that companies amortize balances on a constant level basis over the expected term of contracts in the case of unexpected contract terminations fasb rules that dac must be written off but it is not subject to an impairment test this means that the asset is not measured to see if it is still worth the amount stated on the balance sheet special considerationsdac represents the un recovered investment in the policies issued and is therefore capitalized as an intangible asset to match costs with related revenues over time the acquisition costs are recognized as an expense that reduces the dac asset the process of recognizing the costs in the income statement is known as amortization and refers to the dac asset being amortized or reduced over a number of years amortization requires a basis that determines how much dac should be turned into an expense for each accounting period the amortization basis varies by the federal accounting standards fas classification under fas 60 assumptions are locked in at policy issue and cannot be changed however under fas 97 and 120 assumptions are based on estimates that can be readjusted as needed dac amortization uses estimated gross margins as a basis and an interest rate is applied to the dac based on investment returns prior to the introduction of asu 2010 26 dac was described vaguely as costs that vary with and are primarily related to the acquisition of insurance contracts that led companies with the difficult task of interpreting which expenses qualified for deferral and often prompted a broad range of insurance firms to categorize most of their costs as dac fasb later concluded that dac accounting was being abused the board responded by providing clearer guidelines asu 2010 26 was accompanied by two important changes to meet the capitalization criteria examples of deferrable costs include | |
what is a deferred annuity | a deferred annuity is a contract with an insurance company that promises to pay the owner a regular income or a lump sum at some future date deferred annuities differ from immediate annuities which begin making payments right away | |
how deferred annuities work | there are three basic types of deferred annuities fixed indexed and variable 2 as their name implies fixed annuities promise a specific guaranteed rate of return on the money in the account indexed annuities provide a return that is based on the performance of a particular market index such as the s p 500 the return on variable annuities is based on the performance of a portfolio of mutual funds or sub accounts chosen by the annuity owner all three types of deferred annuities grow on a tax deferred basis 2the period when the investor is paying into the annuity is known as the accumulation phase or savings phase once the investor elects to start receiving income the payout phase or income phase begins many deferred annuities are structured to provide income for the rest of the owner s life and sometimes for their spouse s life as well before purchasing an annuity buyers should make sure they have enough money in a liquid emergency fund | |
what are the disadvantages of a deferred annuity | prospective buyers should also be aware that annuities often have high fees compared to other types of retirement investments including surrender charges they are also complex and sometimes difficult to understand most annuity contracts put strict limits on withdrawals such as allowing just one per year withdrawals may also be subject to surrender fees charged by the insurer in addition if the account holder is under age 59 they will generally face a 10 tax penalty on the amount of the withdrawal that s on top of the income tax they have to pay on the withdrawal 1 | |
is an annuity considered a liquid asset | deferred annuities should be considered long term investments annuities liquidity varies based on the surrender charges laid out in the insurance contract the surrender period is when you would need to pay a hefty fee to exit the contract certainly something you d want to avoid the surrender charge for example 10 declines over time until it arrives at zero 3 these surrender periods can last several years even 15 years during this time most people would consider their investment to be illiquid however once the surrender period has passed the annuity becomes more liquid relatively speaking they may be considered to be more liquid than an asset that you must find a buyer for such as a car or a home but they are still less liquid than for example mutual funds purchased outside of an annuity | |
what happens to an annuity after death | deferred annuities often include a death benefit component if the owner dies while the annuity is still in its accumulation savings phase their heirs may receive some or all of the account s value if the annuity has entered the payout income phase however the insurer may simply keep the remaining money unless the contract includes a provision to keep paying benefits to the owner s heirs for a certain number of years | |
do you pay taxes on a deferred annuity | owners of these insurance contracts pay taxes only when they make withdrawals take a lump sum or begin receiving income from the account at that point the money they receive is taxed at their ordinary income tax rate 2the bottom lineinvestors often use deferred annuities to supplement their other retirement income such as social security they are part of a mix of assets that can sustain you in retirement however due to their high fees and relative illiquidity they aren t the right choice in every scenario | |
what is deferred compensation | deferred compensation is part of an employee s regular compensation that is set aside to be paid at a later date usually at retirement in many cases taxes on this income are deferred postponed until it is paid out there are many forms of deferred compensation including retirement plans pension plans and stock option plans there are qualified and non qualified deferred compensation plans while qualified deferred compensation plans are available to many employees non qualified deferred compensation nqdc plans cater mainly to high income earners who want to put away funds for retirement and find the company 401 k plan inadequate for their needs | |
how deferred compensation works | an employee may negotiate for deferred compensation because it offers immediate tax benefits in many cases the taxes due on the income is deferred until the compensation is paid out often when the employee reaches retirement age 23 if employees expect to be in a lower tax bracket when retiring they have a chance to reduce their tax burden roth 401 k s are an exception as they require the employee to pay taxes on income as it is earned the balance in a roth account is however normally tax free when it is withdrawn 4 it can be a better option for people who expect to be in a higher tax bracket when they retire types of deferred compensationthere are two broad categories of deferred compensation qualified and non qualified these differ in their legal treatment and the purpose they serve qualified deferred compensation plans are governed by the employee retirement income security act erisa a key set of federal regulations for retirement plans 5 they include 401 k plans and many 403 b plans 67funds in qualified deferred compensation plans are for the sole benefit of their recipients creditors cannot access the funds if the company goes bankrupt contributions to the plans are capped by law 8non qualified deferred compensation nqdc plans are contractual agreements between employers and participants also known as 409 a plans or in some cases golden handcuffs nqdcs take different forms including bonus plans equity stock arrangements and supplemental executive retirement plans serps otherwise known as top hat plans 910nqdc plans have no caps on contributions and are typically offered only to top level employees and key talent that the company wants to retain independent contractors are eligible for nqdc plans 11 this isn t the case with qualified deferred compensation plans compensation is usually paid out when the employee retires although there can be provisions for earlier payouts in case of certain events like a change in ownership of the company or a strictly defined emergency depending on the terms of the contract deferred compensation might be canceled by the company if the employee is fired defects to a competitor or otherwise forfeits the benefit from the participant s perspective nqdc plans offer a reduced tax burden and a retirement savings bonus this is especially valued by highly compensated employees because qualified 401 k plans have annual contribution limits 12on the downside the money in nqdc plans does not have the same protection as a 401 k balance if the company goes bankrupt creditors can seize funds from nqdc plans 10for some companies nqdc plans are a way to hire expensive talent without having to pay their full compensation immediately meaning they can postpone funding the obligations that approach however can be a gamble for the employee the employee pays social security and medicare taxes on the deferred income at the time of the deferral but does not pay income tax on it until the funds are actually received 13deferred compensation vs 401 k a deferred compensation plan is generally an addition to a company 401 k plan and may be offered only to a few executives and other key employees as an incentive generally those employees participate in both plans they max out their contributions to the company 401 k while enjoying the bonus of a deferred compensation plan that said a 401 k plan that includes a matching contribution from an employer is technically a form of deferred compensation it s part of a regular salary that is payable only after the employee leaves the company or retires much like a type of non qualified deferred compensation called a golden parachute which is reserved for highly compensated employees 9however the 401 k is a qualified plan meaning the employer must stick to federal regulations that ensure the integrity of such plans non qualifying plans are less regulated advantages of deferred compensationunlike 401 k s or individual retirement accounts iras there are no contribution limits to a deferred compensation plan an eligible employee can for example earmark an annual bonus as retirement savings the money in both of these plans can grow tax free until it is withdrawn the big exception is the roth 401 k or roth ira where contributions are taxed when they are made and no further taxes are due on withdrawals 147the absence of contribution limits can add a great deal of value to a deferred compensation plan for a highly paid employee the plans also offer tax deferred growth and a tax deduction for the period that the contributions are made no limits on contributionstax deferred asset growthcurrent period tax deductionbalances are not protected in case of company bankruptcythe money is not available until retirementno way to borrow against balancethere are however some drawbacks disadvantages of deferred compensationwith a deferred compensation plan you are effectively a creditor of the company lending the company the salary you have deferred if the company declares bankruptcy in the future you can lose some or all of this money 1even if the company remains solid your money is locked up in many cases until retirement meaning that you cannot access it easily depending on the plan s structure you also may find yourself with limited investment options it may include only the company s stock for example unlike with a 401 k plan when funds are received from a deferred compensation plan they cannot be rolled over into an ira account 15 | |
is deferred compensation a good idea | nobody turns down a bonus and that s what deferred compensation typically is a rare exception might be if an employee feels that the salary offer for a job is inadequate and merely looks sweeter when the deferred compensation is added in in particular a younger employee might be unimpressed with a bonus that won t be paid until decades down the road in any case the downside is that deferred compensation cannot be accessed for years normally until the employee retires for most employees saving for retirement via a company s 401 k is most appropriate however high income employees may want to defer a greater amount of their income for retirement than the limits imposed by a 401 k or ira | |
how is deferred compensation paid out | the distribution date may be at retirement or after a specified number of years this must be designated at the time the plan is set up and typically cannot be changed it is generally better for the employee if the deferred income is distributed over several years a large single payout can push the recipient into a higher tax bracket for the year note that distributions cannot be rolled into a qualified retirement plan that means the taxes are due for that year | |
how does deferred compensation affect your taxes | in a non roth scenario those making contributions to a plan enjoy a tax deduction in that year the funds grow tax deferred until the payout date if you retire in a lower tax bracket or a lower tax jurisdiction you will benefit from the tax deferral upon retirement the bottom linethough a 401 k plan with a matching contribution is technically a type of deferred compensation most people are typically referring to the non qualified form when they talk about deferred compensation financial advisors usually suggest you only use a non qualified deferred compensation nqdc plan after you ve made the maximum possible contribution to your 401 k and only if your employer is very solid financially because nqdc plans are not strictly regulated and your funds may not be protected in the case of company bankruptcy 10 deferred compensation plans are non qualified meaning they don t have to follow certain federal regulations tread carefully | |
what is deferred income tax | a deferred income tax is a liability recorded on a balance sheet resulting from a difference in income recognition between tax laws and the company s accounting methods for this reason the company s payable income tax may not equate to the total tax expense reported 1the total tax expense for a specific fiscal year may be different from the tax liability owed to the internal revenue service irs as the company is postponing payment based on accounting rule differences 2zoe hansen investopediaunderstanding deferred income taxin the u s generally accepted accounting principles gaap guide financial accounting practices gaap accounting requires the calculation and disclosure of economic events in a specific manner income tax expense which is a financial accounting record is calculated using gaap income in contrast the irs tax code specifies special rules on the treatment of events the differences between irs rules and gaap guidelines result in different computations of net income and subsequently income taxes due on that income 2a deferred income tax liability results from the difference between the income tax expense reported on the income statement and the income tax payable situations may arise where the income tax payable on a tax return is higher than the income tax expense on a financial statement in time if no other reconciling events happen the deferred income tax account would net to 0 however without a deferred income tax liability account a deferred income tax asset would be created this account would represent the future economic benefit expected to be received because income taxes charged were in excess based on gaap income 1example of deferred incomea common situation that generates a deferred income tax liability is from differences in depreciation methods gaap guidelines allow businesses to choose between multiple depreciation practices however the irs requires the use of a depreciation method that is different from all available gaap methods 34for this reason the amount of depreciation recorded on a financial statement is usually different from the calculations found on a company s tax return over the life of an asset the value of the depreciation in both areas changes at the end of the life of the asset no deferred tax liability exists as the total depreciation between the two methods is equal | |
why is deferred income tax an asset | deferred income tax is considered a liability rather than an asset as it is money owed rather than to be received if a company had overpaid on taxes it would be a deferred tax asset and appear on the balance sheet as a non current asset | |
what is deferred income tax in simple terms | deferred income tax is tax that must be paid in the future to account for differences in how companies recognize income and how tax authorities recognize income | |
what is the difference between current tax and deferred tax | current tax is tax payable while deferred tax is intended to be paid in the future the bottom linethe income tax a company owes to tax authorities may not be the same as the total tax expense reported in its financial statement this discrepancy can happen often and is caused by contrasting income recognition standards between tax and accounting laws the upshot is deferred income tax which is presented as a liability on balance sheets and represents tax that must be paid in the future | |
what is deferred interest | deferred interest is when interest payments are deferred on a loan during a specific period of time you will not pay any interest as long as your entire balance on the loan is paid off before this period ends if you do not pay off the loan balance before this period ends then interest charges start accruing deferred interest options are also available on mortgages known as a deferred interest mortgage or a graduated payment mortgage understanding deferred interestdeferred interest options are usually provided by retailers on big ticket items such as furniture and home appliances it makes it easier and more attractive for a consumer to buy these items than if they had to pay upfront in full or take out a loan with interest increasing the cost of the purchase deferred interest options usually last for a specific period of time where no interest is charged once this period is over and if the loan balance has not been paid then interest charges start accruing sometimes at very high rates it s important for a consumer to be aware of the deferred interest period as well as any fine print laying out the terms of the offer they should also of course ensure that they can pay off the loan before the interest free period is over retailers offer deferred interest or no interest items through their retail credit card or other in house financing options deferred interest loans can also be offered on credit cards typically as a marketing scheme to lure in consumers to sign up for a card credit card companies offer deferred interest or no interest credit cards these credit cards work in the same way as a deferred interest loan with a retailer in that they offer no interest charges on the balance of the credit card for a specific period of time once that period is over interest starts being charged on the remaining balance or any balance going forward if you re considering switching from your current card to one with with a deferred interest rate or no interest rate make sure it s one of the best balance transfer cards currently available typically on deferred interest loans if the balance is not fully paid off before the period ends interest is backdated and charged on the entire original balance regardless of how much of the balance is left mortgages that include deferred interest features work in a slightly different way the amount of interest that is not paid on a mortgage s monthly payment is then added to the principal balance of the loan when a loan s principal balance increases because of deferred interest it is known as negative amortization for example payment option arms a type of adjustable rate mortgage and fixed rate mortgages with a deferrable interest feature carry the risk of the monthly payments increasing substantially at some point over the term of the mortgage deferred interest on mortgagesbefore the mortgage crisis of 2008 programs such as payment option arms had low introductory payments for the first 2 3 years which payments increased significantly afterwards 1 mortgagors could choose a 30 year or 15 year payment an interest only payment covering interest but not reducing the principal balance or a minimum payment that wouldn t even cover the interest due the difference between the minimum payment and the interest due was the deferred interest or negative amortization which was added to the loan balance for example say a mortgagor received a 100 000 payment option arm at a 6 interest rate the borrower could choose from four monthly payment options making the minimum payment means the deferred interest of 178 36 is added to the loan balance monthly after five years the loan balance with deferred interest is recast meaning the required payment increases enough so that the loan can be paid off in 25 years the payment becomes so high that the mortgagor cannot repay the loan and ends up in foreclosure this is one reason why loans with deferred interest are banned in some states and considered predatory by the federal government deferred interest mortgages typically increase the overall cost of a loan and can be a dangerous option | |
what is a deferred profit sharing plan dpsp | a deferred profit sharing plan dpsp is a canadian employer sponsored profit sharing plan intended to help employees save for retirement the money in an employee s dpsp account grows on a tax deferred basis until it is withdrawn understanding deferred profit sharing plans dpsps dpsps are a type of pension plan registered with the canada revenue agency which is basically the canadian version of the internal revenue service irs in the united states on a periodic basis the employer shares profits from the business with all employees or a designated group of them through the dpsp employees who receive a share of the profits paid out by the employer do not have to pay federal taxes on the money until they later withdraw it from the dpsp an employer that offers a dpsp is referred to as the sponsor of the plan the funds are managed by a trustee the money in an employee s dpsp account grows tax deferred which can lead to bigger investment gains over time due to the compounding effect employees can withdraw part or all of their vested funds prior to retirement even if they are still working for that employer they can also transfer the money to another registered plan and maintain its tax deferred status taxes are due only upon withdrawal most plans allow individuals to decide how their dpsp money is invested though some companies may require employees to purchase company stock with their contributions | |
deferred revenue also known as unearned revenue refers to advance payments a company receives for products or services that are to be delivered or performed in the future the company that receives the prepayment records the amount as deferred revenue a liability on its balance sheet | deferred revenue is a liability because it reflects revenue that hasn t yet been earned and it represents products or services that are owed to a customer it s recognized proportionally as revenue on the income statement as the product or service is delivered over time 1investopedia ryan oakley | |
how deferred revenue works | deferred revenue is recognized as a liability on the balance sheet of a company that receives an advance payment because it has an obligation to the customer in the form of the products or services owed the payment is considered a liability to the company because there s a possibility that the good or service may not be delivered or the buyer might cancel the order the company would have to repay the customer in either case unless other payment terms were explicitly stated in a signed contract contracts can stipulate different terms whereby no revenue may be recorded until all of the services or products have been delivered the payments collected from the customer would remain in deferred revenue until the customer has received in full what was due according to the contract generally accepted accounting principles gaap require certain accounting methods and conventions that encourage accounting conservatism that ensures that the company is reporting the lowest possible profit a company that s reporting revenue conservatively will only recognize earned revenue when it has completed certain tasks to have full claim to the money and when the likelihood of payment is certain deferred revenue is often gradually recognized on the income statement to the extent that the revenue is earned as a company delivers services or products categorizing deferred revenue as earned revenue too quickly or simply bypassing the deferred revenue account altogether and posting it directly to revenue on the income statement is considered aggressive accounting and effectively overstates sales revenue deferred revenue is typically reported as a current liability on a company s balance sheet because prepayment terms are typically for 12 months or less 2the portion of the payment that pertains to services or products to be provided after 12 months from the payment date should be classified as deferred revenue under the long term liability section of the balance sheet if a customer made an up front prepayment for services that are expected to be delivered over several years example of deferred revenuedeferred revenue has become more common with subscription based products or services that require prepayments unearned revenue can be rent payments that are received in advance prepayments received for newspaper subscriptions annual prepayments received for the use of software and prepaid insurance this form of revenue has become mainstream as an annual payment to premium membership for accounts such as amazon prime zoom adobe google suite services and ai based services all belong to this category of advanced payment and are encouraged through a discount given by the companies for annual payment versus monthly payment of these subscriptions the other company involved in a prepayment situation would record their advance cash outlay as a prepaid expense or an asset account on their balance sheet the other company recognizes its prepaid amount as an expense over time at the same rate as the first company recognizes earned revenue consider a media company that receives a 1 200 advance payment at the beginning of its fiscal year from a customer who s purchasing an annual newspaper subscription upon receipt of the payment the company s accountant records a debit entry to the cash and cash equivalent account and a credit entry to the deferred revenue account for 1 200 the company sends the newspaper to its customer each month and recognizes revenue as the fiscal year progresses the accountant records a debit entry to the deferred revenue account monthly and a credit entry to the sales revenue account for 100 the entire deferred revenue balance of 1 200 has been gradually booked as revenue on the income statement at the rate of 100 per month by the end of the fiscal year the balance is now 0 in the deferred revenue account can you have deferred revenue in cash basis accounting no revenue in cash basis accounting is reported only after it s been received expenses in cash basis accounting are recorded only when they re paid as well 3 | |
how do you record deferred revenue in an account | the accountant records the amount as a debit entry to the cash and cash equivalent account and as a credit entry to the deferred revenue account when payment is received in advance for a service or product a debit entry for the amount paid is entered into the deferred revenue account and a credit revenue is entered into sales revenue when the service or product is delivered can you have deferred revenue in accrual accounting no accrual accounting records revenue for products or services that have been delivered before payment has been received this is the opposite of deferred revenue in a way that records revenue for services or products yet to be delivered accrual accounting records revenue for payments that have not yet been received for products or services already delivered 1the bottom linedeferred revenue is recorded as such because it s money that hasn t yet been earned the product or service in question has not yet been delivered it s common for businesses to receive payments upfront but such payments are recognized as liabilities on balance sheets because the recipients still owe goods services or possibly a refund if the goods or services never are delivered | |
what is a deferred tax asset | a deferred tax asset is an item on a company s balance sheet that reduces its taxable income in the future such a line item asset can be found when a business overpays its taxes this money will eventually be returned to the business in the form of tax relief therefore the overpayment becomes an asset to the company a deferred tax asset is the opposite of a deferred tax liability which indicates an expected increase in the amount of income tax owed by a company understanding deferred tax assetsa deferred tax asset is often created when taxes are paid or carried forward but cannot yet be recognized on the company s income statement for example deferred tax assets can be created when the tax authorities recognize revenue or expenses at different times than the periods that the company follows as an accounting standard these assets help reduce the company s future tax liability it is important to note that a deferred tax asset is recognized only when the difference between the loss value or depreciation of the asset is expected to offset its future profit 2a deferred tax asset might be compared to rent paid in advance or a refundable insurance premium while the business no longer has the cash on hand it does have its comparable value and this must be reflected in its financial statements investopedia s tax savings guide can help you maximize your tax credits deductions and savings order yours today examples of deferred tax assetsone straightforward example of a deferred tax asset is the carryover of losses if a business incurs a loss in a financial year it usually is entitled to use that loss to lower its taxable income in the following years 3 because the loss will save the company money on its taxes in the future the loss becomes an asset another scenario arises when there is a difference between accounting rules and tax rules for example deferred taxes exist when expenses are recognized in a company s income statement before they are required to be recognized by the tax authorities or when revenue is subject to taxes before it is taxable in the income statement essentially whenever the tax base or tax rules for assets and or liabilities are different there is an opportunity for the creation of a deferred tax asset there is no time limit on deferred tax assets they can be used when it makes the most financial sense for a company however deferred tax assets can t be used with tax returns that have already been filed | |
how to calculate a deferred tax asset | say a computer manufacturing company estimates based on past experience that the percentage of computers that will be sent back for warranty repairs in the next year is 2 of the total production if the company s total revenue in year one is 3 000 and the warranty expense in its books is 60 2 x 3 000 then the company s taxable income is 2 940 however most tax authorities do not allow companies to deduct expenses based on expected warranties thus the company is required to pay taxes on the full 3 000 if the tax rate for the company is 30 the difference of 18 60 x 30 between the taxes payable in the income statement and the actual taxes paid to the tax authorities is a deferred tax asset special considerationsthere are some key characteristics of deferred tax assets to consider first starting in the 2018 tax year they could be carried forward indefinitely for most companies but are no longer able to be carried back 4some farming losses may still be carried back for up to two years 5the second thing to consider is how tax rates affect the value of deferred tax assets if the tax rate goes up it works in the company s favor because the assets values also go up this provides a bigger cushion for a larger income but if the tax rate drops the tax asset value also declines this means that the company may not be able to use the whole benefit before the tax day deadline | |
why do deferred tax assets occur | a balance sheet may reflect a deferred tax asset if a company has prepaid its taxes it also may occur simply because of a difference in the time that a company pays its taxes and the time that the tax authority credits it or the company may have overpaid its taxes in such cases the company s books need to reflect taxes paid by the company or money due to it | |
do deferred tax assets carry forward | yes beginning in 2018 taxpayers could carry deferred tax assets forward indefinitely 1 they never expire and companies use them when it s most beneficial to do so | |
what is a deferred tax asset vs a deferred tax liability | a deferred tax asset represents a financial benefit while a deferred tax liability indicates a future tax obligation or payment due for example retirement savers with traditional 401 k plans make contributions to their accounts using pre tax income when that money is eventually withdrawn income tax is due on those contributions 6 that is a deferred tax liability the bottom linea deferred tax asset relates to an overpayment or advance payment of taxes this can occur when there is a difference between when a tax authority recognizes revenue and when a company does based on the accounting standards that the latter follows or it may happen because a current loss can be carried forward and reduce a company s future tax liability a deferred tax asset can reduce a company s taxable income in the future deferred tax assets are financial assets as opposed to tangible assets that appear on a company s balance sheet as non current assets | |
what is a deferred tax liability | a deferred tax liability is a listing on a company s balance sheet that records taxes that are owed but are not due to be paid until a future date the liability is deferred due to a difference in timing between when the tax was accrued and when it is due to be paid for example it might reflect a taxable transaction such as an installment sale that took place one a certain date but the taxes will not be due until a later date investopedia michela buttignol | |
how deferred tax liability works | the deferred tax liability on a company balance sheet represents a future tax payment that the company is obligated to pay in the future 2it is calculated as the company s anticipated tax rate times the difference between its taxable income and accounting earnings before taxes deferred tax liability is the amount of taxes a company has underpaid which will be made up in the future this doesn t mean that the company hasn t fulfilled its tax obligations rather it recognizes a payment that is not yet due for example a company that earned net income for the year knows it will have to pay corporate income taxes because the tax liability applies to the current year it must reflect an expense for the same period 3 but the tax will not actually be paid until the next calendar year in order to rectify the accrual cash timing difference tax is recorded as a deferred tax liability examples of deferred tax liabilitya common source of deferred tax liability is the difference in depreciation expense treatment by tax laws and accounting rules the depreciation expense for long lived assets for financial statement purposes is typically calculated using a straight line method while tax regulations allow companies to use an accelerated depreciation method since the straight line method produces lower depreciation when compared to that of the under accelerated method a company s accounting income is temporarily higher than its taxable income the company recognizes the deferred tax liability on the differential between its accounting earnings before taxes and taxable income as the company continues depreciating its assets the difference between straight line depreciation and accelerated depreciation narrows and the amount of deferred tax liability is gradually removed through a series of offsetting accounting entries another common source of deferred tax liability is an installment sale this is the revenue recognized when a company sells its products on credit to be paid off in equal amounts in the future 2under accounting rules the company is allowed to recognize full income from the installment sale of general merchandise while tax laws require companies to recognize the income when installment payments are made 4this creates a temporary positive difference between the company s accounting earnings and taxable income as well as a deferred tax liability 2 | |
is deferred tax liability a good or bad thing | deferred tax liability is a record of taxes that have been incurred but have not yet been paid this line item on a company s balance sheet reserves money for a known future expensethat reduces the cash flow that a company has available to spend but that s not a bad thing the money has been earmarked for a specific purpose i e paying taxes the company owes the company could be in trouble if it spends that money on anything else |
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