What are deferred tax liabilities?

Deferred taxes are taxes resulting from timing differences when a firm uses different methods for its financial accounting and tax accounting.  Tax expense relates to the income statement; the taxes that are actually due relate to tax returns.  Deferred tax items are netted, resulting in either a deferred tax asset or liability.

Deferred tax liability is a balance sheet account showing the estimated amount of taxes on income earned and recognized for accounting purposes (book income) but not yet due and payable for income tax purposes (taxable income).  When, for example, different depreciation methods are used for book purposes and tax purposes, the amount of depreciation expense in the firm’s income statement and its tax returns will be different.

Under the equity method of accounting for investments, the investor must recognize deferred income tax expense on the earned but undistributed profit of the investee that will be taxed when dividends are received in a future period.

An interperiod income tax allocation is the allocation of a firm’s income tax obligation as an expense to different accounting periods due to timing differences between its book income and taxable income.  It produces a tax expense that is greater than tax payable, resulting in a deferred tax liability.