Deferred Income Tax Liability What Is It

Deferred Income Tax Liability What Is It

You essentially provide money to a company when you invest in it, allowing it to expand. The issue is that investing money in a business doesn’t immediately affect your own cash flow. How then can you make back your investment? with an equity option program.

You’re likely to receive restricted stock options if your employer includes shares in your employment package. Stock that is subject to restrictions is known as restricted stock.

Employees typically cannot sell their shares until after a set period of time has elapsed and only if their company meets certain requirements.

Read on for more information about restricted stock and other forms of job compensation. All the information you require regarding deferred tax liability—including the formula—will be covered in this handbook. We’ll also demonstrate how to compute deferred tax liability correctly.


  • A form of long-term liability is deferred tax liability. It happens when businesses put off paying taxes on specific forms of accounting income.
  • The amount of the obligation is the discrepancy between a company’s accounting or book income and its taxable income.
  • On a company’s financial statements and cash flow, deferred tax liabilities can have a big effect.

Deferred tax liabilities: what are they?

A company’s tax debt to the government that has not yet been settled is known as a deferred tax liability. The tax laws permit businesses to postpone or delay paying taxes on specific forms of accounting income, which gives rise to the liability.

Companies can change the timing of their tax payments using this accounting technique. In some circumstances, even though your business produced a profit in a particular year, due to the laws, the tax on the revenue will be paid in a subsequent year.

When the profit on the income statement is higher than in the tax return, a deferred tax liability is produced. The time of when the taxes must be paid makes the difference only temporary.

Deferred Tax Liability Calculation Formula

A deferred tax liability is determined using the following formula:

Deferred Tax Liability is calculated as Tax Rate*(Taxable Income - Taxable Expenses)

How Does A Deferred Tax Liability Occur?

When the tax income on the financial accounts of the company is less than the book income, deferred tax liability results. This occurs when expenses are incurred at a different time than they are for tax purposes. A business might have reported taxable income that is less than book income, for instance. When expenses are written off for tax purposes but not according to accounting principles, this occurs. For instance, a business could be able to claim a larger deduction for depreciation on its taxes than on its financial statements.

What Happens When Tax Liability Is Deferred?

By delaying the payment of taxes on specific categories of income, deferred tax liability (DTL) is created. The money might be used by the business to invest in ventures that generate profits while the tax is being paid ultimately.

The amount of the deferred liability is equal to the difference between the tax due on the business’s taxable income and its book income. Once determined, the sum will be recorded in the liability area of the balance sheet.

How is the deferred tax liability determined?

The gap between taxable income and earnings before taxes is used to determine the deferred tax liability. After that, the tax rate is multiplied by this.

An Illustration Of Deferred Tax Liability

A corporation reported a book income of $90,000 and a taxable income of $100,000. The corporation pays 21% in taxes. The deferred tax liability for the business would be $2,100 (or 21% of $100,000 minus 21% of $90,000).

The calculation is demonstrated in the example using the entire income difference. The disparity in income could have been caused by:

Property Depreciation: The difference between the amount of depreciation deducted for book and tax reasons means that the expense on your tax return will be higher than the expense on your income statement.

Installment Sales: On your tax return, you reported greater income from prepaid subscription sales than you did on your income statement.

Credit Sales: Sales made on credit entail the payment of taxes on the purchasers’ payments at a later date.

Exactly why is deferred tax liability important?

Deferred Tax Liability is significant since it allows you to save more cash today by deferring the payment to a later date. You can invest in assets that produce income to increase your income over the long term by saving the money you would have spent on your tax payment today.


An essential instrument for accounting for income taxes is a deferred tax liability. It enables firms to defer making their tax payments until later. In the event that tax rates alter in the future, it also enables businesses to control their tax exposure.accounting records.

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