What Is Deferred Tax Liability?

Confused by the concept of “deferred tax liabilities”? The good news is that deferred tax payments are much less complicated than they seem. Here’s an overview of how deferred taxes work, why they occur, and how to calculate your payments.

What Is a Deferred Tax Liability?

A deferred tax liability (DTL) is simply a tax liability you’re deferring until a later date. You owe tax, but you’re postponing the obligation to pay it. In other words, your taxes accrue in one period, but they’re not paid until the next period.

Are DTLs compatible with US tax laws? Absolutely. In fact, they’re a common business occurrence. All you’re doing is acknowledging a temporary difference in the taxes you owe but which are not yet “due”.

How Do Deferred Tax Liabilities Work?

The liability is the difference between your current taxable income and your book income. It happens, usually, when you need to list an item on your balance sheet but the tax is not yet due. The amount should be listed in the “liability” section of your balance sheet so you can keep track of it.

Why Do Deferred Taxes Matter?

There are various reasons why businesses should care about deferred tax liability.

• Deferred tax liability can impact your cash flow. You must remember that the tax obligation still exists, even if you’re not paying it right now. Paying the tax at a later date must be budgeted for.
• Accounting for deferred tax liabilities lets you forecast financial projections more accurately. Accurate financial data is crucial for making business decisions.
• Rather than paying company taxes right now, you can use the surplus income to invest in business growth.

When Do Deferred Tax Liabilities Happen?

DTLs typically occur for one of three reasons.

• Inventory valuation: Differences in how companies value their stock, or inventory, for financial reporting purposes, can cause tax discrepancies.
• Asset depreciation: How companies choose to calculate depreciation expenses can impact when tax should be paid.
• Revenue recognition: Installment payments can cause a difference between when revenue is earned and when it should be taxed.

Here are some deferred tax liability examples.

• Company A records the most recently produced items as the ones they sold first. This lets them minimize their taxable income in a particular year. They can list the temporary income difference as a liability.
• Company B uses one method of asset depreciation for its tax books. It uses another method for its own financial reporting. The difference is recorded as a deferred tax liability.
• Company C sells a customer goods worth $5,000. The customer pays monthly. The company records the whole sale value as income but defers tax on the sums not yet paid.

DTLs come down to a company recognizing it has tax outstanding, but there’s no immediate obligation to pay. It’s important to understand why they arise, though, so you don’t violate any tax or accounting rules.

Deferred Tax Asset vs Liability

Is there a difference between a deferred tax “asset” and “liability”? Yes. While they both represent temporary changes in taxes paid and taxes due, they mean different things.

• A deferred tax asset is tax you’ve overpaid and can claim back. It reduces your taxable income.
• A deferred tax liability is an obligation to pay tax. You’re recognizing that there’s a tax debt to pay from future income.

The key takeaway is that you can’t forget about DTLs. You’re still obliged to pay the tax. But if you have a deferred tax asset, you’re temporarily in credit.

Should I Worry About Deferred Tax Liabilities?

No. All it means is that your business owes money to the tax authorities. You’re just not paying it right away.

Deferred taxes are a business reality. They’re neither “good” nor “bad”. What matters is that you account for the debt so you’re in a position to pay your taxes at a later date. Failing to budget for deferred taxes can lead to accruing significant tax debt.

Are you worried about meeting your deferred income tax liability? Or any other outstanding tax debt? Contact Innovative Tax Relief LLC now for a free consultation. The sooner you address the issue, the less tax debt you will accumulate.

What Is the Process for Calculating Deferred Tax Liabilities?

The process for calculating your deferred tax liability is fairly straightforward.

We’re looking at the difference between your taxable income and your pre-tax account earnings. Once you know this figure, you multiply it by the expected tax rate.

An example makes this clearer.

• Say your tax rate is 20%. You have an asset worth $10,000 that depreciates in value over the next 10 years.
• You use the straight-line depreciation method. You record $2,000 in depreciation in year two of the asset’s life cycle. This figure goes into your general financial records.
• For your tax records, you use the Modified Accelerated Cost Recovery System (MACRS). This gives you a depreciation value of $2,700 in year two.
• You now have an (albeit temporary) difference of $700.
• Multiply $700 by your tax rate (20%). This gives you $140. You record $140 as your deferred tax liability.

Don’t hesitate to contact us if you need any assistance calculating your DTLs.

Get the Tax Support Your Business Needs | Innovative Tax Relief LLC

Knowing the amount of taxes you owe is crucial to complying with accounting standards. However, when you’re busy running your business, it’s easy to lose track of your tax assets and liabilities. That’s where we can help.

At Innovative Tax Relief LLC, we provide a range of tax services to growing businesses. From tax planning to IRS representation, we help you stay in control of your tax returns. And if you have tax debt, we’ll help you devise a strategy for resolving the issue. We understand how stressful tax debt can be, and we want to help you through the process.

Let us ease the burden of tax compliance for you. Contact us now for a free consultation on our tax services!