Deferred Tax Liability

A deferred tax liability is an amount of income tax that a company has already incurred but has not yet paid. This can happen when a company has a temporary difference between its taxable income and its financial income. A temporary difference is a difference between the carrying amount of an asset or liability in the financial statements and its tax basis.

There are two types of deferred tax liabilities:

• Timing differences arise when the timing of the recognition of income or expenses for financial reporting purposes differs from the timing for tax purposes. For example, a company may deduct the cost of an asset for financial reporting purposes over several years, but it may be able to deduct the entire cost of the asset for tax purposes in the year it is purchased.
• Permanent differences arise when certain items of income or expense are never included in taxable income. For example, interest income from municipal bonds is not taxable.

Deferred tax liabilities are recorded on a company's balance sheet as a liability. The amount of the deferred tax liability is the amount of income tax that the company expects to pay in future years.

Deferred tax liabilities can have a significant impact on a company's financial statements. They can reduce a company's net income and increase its taxes payable. They can also affect a company's cash flow, as the company may have to make payments to the government to settle its deferred tax liabilities.

Deferred tax liabilities are a complex topic. It is important for companies to understand how deferred tax liabilities work and how they can affect their financial statements.