What is Deferred tax liability?
In short
A deferred tax liability is the future tax payable on taxable temporary differences: items that make taxable income lower now and higher later than book income.
Key takeaways
- The classic cause is tax depreciation that is faster than book depreciation.
- Permanent differences, such as tax-exempt municipal bond interest, never create deferred taxes.
- Total income tax expense equals current tax plus the change in deferred tax balances.
Example
Tax depreciation exceeds book depreciation by $80,000; at a 21% rate the deferred tax liability is $16,800.
Where it's tested
FAR: Income Taxes (Deferred Tax Accounting) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company recognizes a warranty expense of $40,000 for book purposes in the current year, but the deduction is not allowed for tax purposes until the warranty claims are actually paid in future years. What is the tax effect of this temporary difference?