Deferred Tax Liability

Deferred Tax Liability

A Deferred Tax Liability (DTL) is a tax obligation that a company owes to the government for future payment, arising due to differences between the accounting income recognized under generally accepted accounting principles (GAAP) and the taxable income reported to the tax authorities. This situation typically occurs when income is recognized in the financial statements before it is recognized for tax purposes, resulting in a temporary difference.

For example, if a company uses accelerated depreciation for tax purposes but straight-line depreciation for financial reporting, it may report higher earnings in its financial statements compared to its tax return. The difference in depreciation methods creates a Deferred Tax Liability because the company will ultimately pay more taxes in the future when the temporary difference reverses.