What is a Deferred Tax Liability and what is its purpose?

Student | Posted on 19-Mar-2019

What is a Deferred Tax Liability

A deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid.The deferral comes from the difference in timing between when the tax is accrued and when the tax is paid.A deferred tax liability records the fact the company will, in the future, pay moreincome taxbecause of a transaction that took place during the current period, such as aninstallment sale receivable.

Liability

Because Indian. tax laws and accounting rules differ, a company's earnings before taxes on the income statement can be greater than its taxable income on a tax return, giving rise to a deferred tax liability on the company's balance sheet. The deferred tax liability represents a future tax payment a company is expected to make to appropriate tax authorities in the future, and it is calculated as the company's anticipated tax rate times the difference between its taxable income and accounting earnings before taxes.

Examples-

A common source of deferred tax liability is the difference in deprecoation expense treatment by tax laws and accounting rules. The depreciation expense for long-lived assets for financial statemnets purposes is typically calculated using a straight-line method, while tax regulations allow companies to use an accelerated depreciation method. Since the straight-line method produces lower depreciation when compared to that of the underaccelerated method, a company's accounting income is temporarily higher than its taxable income. The company recognizes the deferred tax liability on the differential between its accounting earnings before taxes and taxable income. As the company continues depreciating its assets, the difference between straight-line depreciation and accelerated depreciation narrows, and the amount of deferred tax liability is gradually removed through a series of offsetting accounting entries.

The video link to

better explain the concept is given below:

https://youtu.be/KOcx8vPvjlQ

| Posted on 19-Mar-2019

Deferred tax liability is the amount of taxes a company has underpaid which will be made in future.

In other words,

Deferred Tax Liability arises due to timing difference in the value of Assets as per Books of Accounts and as per Income Tax Act.

@Blogger | Posted on 10-Mar-2019

The tax assessed or it is due for the current period and has not been paid yet, then it is known as Deferred Tax Liability. The difference in the timing when the tax is paid and is accrued is the time from which the deferral comes. It commonly arises in depreciating fixed assets, recognizing revenues and during the valuation of inventories.

Letsdiskuss

The deferred tax liability also tells us how much more tax company has to pay in future because of the present transactions.

Reasons why deferred tax liabilities occur are:
I. Accounting of figures more than once.
II. Companies aiming only towards showing increased profits in order to increase the shareholders for their company.
III. Companies also follow the technique to increase the current profits in order to reduce the tax burden.