Determinants and Drivers of Large Negative Book-Tax Differences: Evidence from S&P 500

Temporary book-tax differences (BTDs) serve as critical proxies for understanding corporate earnings management and tax planning. However, the drivers of large negative BTDs (LNBTDs)—where book income falls below taxable income—remain underexplored. This study investigates the determinants and components of LNBTDs, focusing on their relationship with deferred tax assets (DTAs) and liabilities (DTLs). Utilizing hand-collected data from the tax disclosures of S&P 500 firms’ 10-K filings (2007–2023), I analyze 4685 firm-year observations to identify specific accounting items driving LNBTDs. Findings reveal that deferred revenue, goodwill impairments, R&D, CapEx, environmental obligations, pensions, contingency liabilities, leases, and receivables are significant contributors, often generating substantial DTAs due to timing mismatches between book and tax recognition. Notably, high-tech industries, like the pharmaceutical, medical, and computers and software industries, exhibit pronounced LNBTDs, driven by upfront revenue recognition for tax purposes and deferred recognition for financial reporting, capitalization, amortization and depreciation effects, and other deferred tax components. Regression analyses confirm strong associations between these components and LNBTDs, with asymmetry in reversal patterns suggesting that initial differences do not always offset symmetrically over time. While prior research emphasizes large positive BTDs and tax avoidance, this study highlights economic and industry-specific characteristics as key LNBTD drivers, with limited evidence of earnings manipulation via deferred taxes. These insights enhance the value relevance of deferred tax disclosures and offer implications for reporting standards, tax policy, and research into BTD dynamics.

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Publication Details

Journal
Journal of risk and financial management
Published
2025-05-23
DOI
https://doi.org/10.3390/jrfm18060291
Primary Topic
Corporate Taxation and Avoidance
Type
article
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article

Determinants and Drivers of Large Negative Book-Tax Differences: Evidence from S&P 500

Sina Rahiminejad
Journal of risk and financial management
Corporate Taxation and Avoidance
article

Determinants and Drivers of Large Negative Book-Tax Differences: Evidence from S&P 500

Sina Rahiminejad
article en

Abstract

Temporary book-tax differences (BTDs) serve as critical proxies for understanding corporate earnings management and tax planning. However, the drivers of large negative BTDs (LNBTDs)—where book income falls below taxable income—remain underexplored. This study investigates the determinants and components of LNBTDs, focusing on their relationship with deferred tax assets (DTAs) and liabilities (DTLs). Utilizing hand-collected data from the tax disclosures of S&P 500 firms’ 10-K filings (2007–2023), I analyze 4685 firm-year observations to identify specific accounting items driving LNBTDs. Findings reveal that deferred revenue, goodwill impairments, R&D, CapEx, environmental obligations, pensions, contingency liabilities, leases, and receivables are significant contributors, often generating substantial DTAs due to timing mismatches between book and tax recognition. Notably, high-tech industries, like the pharmaceutical, medical, and computers and software industries, exhibit pronounced LNBTDs, driven by upfront revenue recognition for tax purposes and deferred recognition for financial reporting, capitalization, amortization and depreciation effects, and other deferred tax components. Regression analyses confirm strong associations between these components and LNBTDs, with asymmetry in reversal patterns suggesting that initial differences do not always offset symmetrically over time. While prior research emphasizes large positive BTDs and tax avoidance, this study highlights economic and industry-specific characteristics as key LNBTD drivers, with limited evidence of earnings manipulation via deferred taxes. These insights enhance the value relevance of deferred tax disclosures and offer implications for reporting standards, tax policy, and research into BTD dynamics.

Journal of risk and financial managementVol. 18(6)
Wichita State University (US)
Openalex Percentile: Top 84%
Corporate Taxation and Avoidance
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Determinants and Drivers of Large Negative Book-Tax Differences: Evidence from S&P 500 — Sina Rahiminejad · Journal of risk and financial management (2025) | TGRS Research Map | TGRS