The amount of taxes a company has underpaid or not paid that has to be made up in the future is known as a deferred tax liability. Underpaid doesn't mean that it hasn't fulfilled tax responsibilities; instead, it means that this liability is to be paid on a different timetable. The delay is acquired from the difference in the period between the tax accruement and payment of tax.
Thus, deferred tax liability indicates the future tax payment of a company. It is calculated as per the anticipated tax rate of the company multiplied by the difference between its pre-taxation accounting earnings and taxable income.
Suppose, a company has gained the net income of the year and is now required to pay the corporate income taxes since the tax liability is with respect to the current year, they may reflect an expense for the same too. But here the payment of the taxes will not be done until the next year. This timing difference is said recorded as a liability that is the deferred tax liability.
One of the most frequent sources of deferred tax liability is the change in the treatment of accounting rules and depreciation expenses specified as per the tax laws. In this case, all the expense is counted as depreciation for financial statements, and they are calculated in a straight-line method. While, in modern tax regulations, companies are allowed to use an accelerated depreciation method.
As the straight-line method shows away a result of lower depreciation when it is compared to the under accelerated process, the income of the company according to the accounts becomes temporarily inclined than its taxable income. Companies keep on depreciating their assets, and thus, the difference between accelerated depreciation and straight-line depreciation narrows down.
Deferred Tax Liability is an essential part of a company’s Financial Statements. These adjustments made at the end of the financial year in the books of accounts affect the Income-tax outgoing of business for the concerned year as well as the years to come.