What are Timing Differences?

Timing differences are the intervals between when revenues and expenses are reported for financial statement and income tax reporting purposes. When there are timing differences, the amount of reported taxable income could vary significantly from the amount reported on the income statement. Over a period of time, these timing differences will even out, though they may be replaced by a new set of timing differences.

Examples of Timing Differences

Here are several examples of timing differences:

Depreciation-based timing difference. A business uses an accelerated depreciation method to increase its depreciation expense for tax reporting purposes in the current year, while reporting depreciation at a reduced rate on its income statement that spreads the expense more evenly over several years.
Warranty-based timing difference. A business recognizes an accrued warranty expense in its financial statements as soon as it sells a product, but only recognizes the expense for tax purposes when it actually provides warranty servicing to a customer - which may be several months later.
Prepaid expenses timing difference. A business might pay for insurance or rent upfront and record it as a prepaid expense on financial statements, recognizing the expense gradually over time. For tax purposes, however, the full amount might be deducted in the year it is paid. This leads to a temporary difference, as the expense is recognized at different times for accounting and tax purposes.
Revenue recognition on long-term contracts timing difference. Financial accounting may use the percentage-of-completion method, recognizing revenue as work progresses on a long-term contract. In contrast, tax reporting might require the completed-contract method, where revenue is recognized only when the entire project is finished. This difference in timing causes the reported revenue to vary between financial statements and tax filings.
Bad debt expense timing difference. In financial reporting, bad debt expense is estimated using the allowance method, recognizing potential uncollectible accounts in the same period as the related revenue. For tax purposes, only actual write-offs of uncollectible accounts are deductible. This causes a timing difference because the expense appears earlier on financial statements than on the tax return.