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.