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

Abstract

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 4,685 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 Pharmaceutical, Medical, Computers and Software 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.

Keywords: Deferred Tax liability, Book-Tax difference, R&D, CAPX, Deferred tax components