What is a Deferred Tax Liability?

A deferred tax liability is income taxes payable in a future period. The liability arises from differences in the methods used to account for certain transactions under tax rules and the applicable accounting framework. A considerable number of reporting periods may pass before a deferred tax liability is paid.

Example of a Deferred Tax Liability

A company uses straight-line depreciation for accounting purposes but accelerated depreciation for tax purposes. In the early years, its tax depreciation will be higher than the book (accounting) depreciation, resulting in lower taxable income initially but higher taxable income in later years as the depreciation evens out. The company defers part of its tax expense to a future period, creating a deferred tax liability.