Deferred Income Tax: Definition, Purpose, and Examples

Deferred income tax (DIT) is the amount of income tax that a company has already paid but is not yet due. This can happen when a company has a temporary difference between its taxable income and its financial income. A temporary difference is an amount that will eventually reverse, such as when a company expenses an asset over time but depreciates it for tax purposes all at once.

There are two types of deferred income tax:

* **Taxable temporary differences** are amounts that will eventually be taxed, such as when a company expenses an asset over time but depreciates it for tax purposes all at once.
* **Deductible temporary differences** are amounts that will eventually be deducted, such as when a company receives a prepayment for services that will be performed in the future.

Deferred income tax is recorded on a company's balance sheet as a liability. The amount of deferred income tax is calculated by multiplying the temporary difference by the company's tax rate.

The purpose of deferred income tax is to ensure that companies pay the correct amount of income tax over time. By recording deferred income tax, companies avoid paying too much tax in one year and then having to pay back taxes in a future year.

Here are some examples of deferred income tax:

* A company that receives a prepayment for services that will be performed in the future has a deductible temporary difference. The company will eventually have to recognize the revenue from the prepayment, which will reduce its taxable income. The company will therefore have to pay less tax in the future.
* A company that expenses an asset over time has a taxable temporary difference. The company will eventually have to depreciate the asset for tax purposes, which will increase its taxable income. The company will therefore have to pay more tax in the future.

Deferred income tax can be a complex topic, but it is important for businesses to understand how it works. By understanding deferred income tax, businesses can ensure that they are paying the correct amount of tax over time.