A deferred tax liability is a listing on a companys balance sheet that records taxes that are owed but are not due to be paid until a future date. It represents an obligation to pay taxes in the future, and is deferred due to a difference in timing between when the tax was accrued and when it is due to be paid. The liability is calculated as the company's anticipated tax rate times the difference between its taxable income and accounting earnings before taxes. Deferred tax liabilities arise from temporary timing differences between the taxes recorded under book (U.S. GAAP) and tax accounting, where the actual amount of taxes paid to the IRS were less than the amount reported on the income statement.
Some common situations that give rise to deferred tax liability include:
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Depreciation of fixed assets: Tax laws allow for the modified accelerated cost recovery system (MACRS) depreciation method, while most companies use the straight-line depreciation method for financial reporting.
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Installment sales: Taxes might not be due until a later date for a taxable transaction such as an installment sale that took place on a certain date.
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Accrued expenses: A company may accrue expenses in its financial statements before they are tax-deductible, leading to a deferred tax liability.
Deferred tax liabilities are the opposite of deferred tax assets, which are business tax credits for future taxes.
