Deferred tax liability is a tax expense amount reported on a company’s income statement that is not actually paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company actually pays less in taxes to the IRS than they show as an expense on their income statement in a reporting period.
Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences in income between the two, which ultimately leads to differences in tax expense reported in the financial statements and taxes payable to the IRS.
A deferred tax liability is a listing on a company’s balance sheet that records taxes that are owed but are not due to be paid until a future date.
The liability is deferred due to a difference in timing between when the tax was accrued and when it is due to be paid. For example, it might reflect a taxable transaction such as an installment sale that took place one a certain date but the taxes will not be due until a later date.
A deferred tax liability represents an obligation to pay taxes in the future.
The obligation originates when a company or individual delays an event that would cause it to also recognize tax expenses in the current period.
For instance, earning returns in a qualified retirement plan, like a 401(k), represents a deferred tax liability since the retirement saver will eventually have to pay taxes on the saved income and gains upon withdrawal.1