Next video:
Loading the player...

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.

Related Articles
  1. Investing

    Understanding How Oil Companies Pay Taxes

    Read about how big oil corporations pay taxes, and learn about tax exemptions and the option to defer. Discover the argument about big oil being given tax exemptions
  2. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  3. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  4. Financial Advisor

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  5. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  6. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  7. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
Hot Definitions
  1. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  2. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  3. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  4. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Candlestick

    A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick ...
Trading Center