Deferred Tax Liability
A balance sheet obligation representing taxes owed in the future because book income exceeds taxable income today.
What is Deferred Tax Liability?
A deferred tax liability (DTL) arises when a company's taxable income — reported to the IRS — is lower than its book income reported under GAAP, creating a future tax obligation. The most common cause is the use of accelerated depreciation for tax purposes (which lowers taxable income now) while using straight-line depreciation on the financial statements (which produces higher book income now). Other causes include installment sales, prepaid revenues recognized differently for tax and GAAP, and certain employee benefit accruals. The DTL represents taxes that have been postponed but must eventually be paid. It appears as a non-current liability on the balance sheet. A growing DTL is generally favorable in the near term because it signals the company is deferring tax payments, improving near-term cash flow.
Example
A company purchases $1,000,000 of equipment and depreciates it over 5 years straight-line for GAAP ($200,000/year) but uses bonus depreciation to deduct the full cost in year 1 for taxes. In year 1, book depreciation is $200,000 but tax depreciation is $1,000,000 — creating an $800,000 temporary difference. At a 21% tax rate, the company records an $168,000 deferred tax liability.
Source: FASB ASC 740 — Income Taxes