In the given scenario, where you are eligible for a 200% deduction under income tax on the purchase of machinery, it will impact the treatment of deferred tax assets and liabilities over the useful life of the machinery (5 years).
Deferred tax assets and liabilities arise due to temporary differences between taxable income and accounting income. In this case, the difference arises because of the accelerated depreciation allowed for tax purposes (200% deduction) compared to the depreciation recorded for accounting purposes (based on the useful life of 5 years).
Year 1: In the first year, you would record a deferred tax asset because the tax depreciation (200% deduction) exceeds the accounting depreciation, resulting in a deferred tax benefit. This is because you have paid less tax due to the higher deduction, and this benefit will be realized in future periods when the accounting depreciation catches up with the tax depreciation.
Years 2 to 5: In subsequent years, as the accounting depreciation catches up with the tax depreciation, the deferred tax asset recognized in the first year will be gradually reversed. Each year, you will reduce the deferred tax asset and recognize a corresponding tax expense, bringing the deferred tax asset balance to zero by the end of the useful life of the machinery.
