Deferred Tax Liability

20 Jan Deferred Tax Liability

Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the tax and payment of the tax. For instance, a company earned net income for the year, and thus knows it will have to pay corporate income taxes. The tax liability applies to the current year and so must reflect an expense for the current year. However, the tax will not actually be paid until the next calendar year. The solution for this accrual/cash timing difference is to record the tax as a deferred tax liability.

In addition, a deferred tax liability arises because of differences in the way net income is calculated for financial purposes and the way it’s calculated for income tax purposes. The most common book/tax difference is for depreciation, where tax rules may allow for accelerated depreciation methods that are not allowed for financial reporting.

Accounting for deferred tax liabilities is a result of adherence to the matching principle of accounting that states that expenses, like taxes, must be accounted for in the period for which they apply, rather than the period where cash is used to pay them.

Source: http://www.investopedia.com/video/play/deferred-tax-liability/