Deferred tax liability means that a company may owe more taxes in the future because of temporary differences between how they report certain items in their financial statements and how those items are treated for tax purposes. Calculating deferred tax liability involves determining the temporary differences between the accounting treatment of certain items and their tax treatment and applying the applicable tax rates.

Let's look at an example- when a business calculates depreciation differently for tax filings than for financial reporting, there may be a short-term discrepancy that might lead to a greater tax obligation later on. Another instance of DTL is if they record revenue differently for tax purposes than they do in their financial statements.

DTL calculation and examples

Here’s how to calculate your deferred tax liability-

• Identify specific items causing temporary differences in accounting and tax treatment, such as revenue recognition, expense recognition, depreciation, and inventory valuation.
• Determine if each temporary difference will lead to higher taxable income or lower deductible expenses in the future, based on future tax liability or benefit.
• Apply the relevant tax rates that will be in effect when the temporary differences reverse, considering current and expected future tax rates.
• Multiply the taxable or deductible amounts by the applicable tax rates to calculate the deferred tax liability for each temporary difference.
• Sum up the deferred tax liabilities for all temporary differences to calculate the total deferred tax liability. Present this amount as a liability in the financial statements.

Tax liabilities Examples

Depreciation:

Suppose a company uses accelerated depreciation for tax purposes, allowing them to deduct a higher portion of an asset's cost upfront. However, for financial reporting, they use straight-line depreciation. The temporary difference between depreciation methods creates a deferred tax liability.

Revenue Recognition:

Let's say a company recognizes revenue differently for financial reporting and tax purposes. For financial reporting, revenue may be recognized over time, while for tax purposes, revenue may be recognized when cash is received. This results in a deferred tax liability.

Intangible Assets:

If a company acquires intangible assets and the tax laws allow for a different amortization period than the accounting standards, it can create a temporary difference. The resulting deferred tax liability arises because the taxable income will be higher in the future due to a longer amortization period for tax purposes compared to the one for financial reporting.

Not all liabilities are the same!

Not all liabilities are the same. And while some liabilities might be unfavourable for your finances, others can help them grow! A personal loan is categorised as a liability but it can help you build up your finances and achieve personal goals.

If you want to simplify your tax filing process, using intuitive statements can help. By making sure that your financial statements align with tax laws, you can avoid unnecessary tax liabilities and keep your finances in order. Fi Money's Ask Fi, an intuitive personal finance assistant, can also help with this process by providing insights and guidance on your financial statements. With Fi, you can streamline your financial management and make sense of your money, so you can focus on growing your wealth.

Frequently asked questions

1. What is deferred tax liability and examples?

The meaning of Deferred tax liability is that a company may owe more taxes in the future because of temporary differences between how they report certain items in their financial statements and how those items are treated for tax purposes.

Deferred tax liability example- holding investments with unrealized gains creates temporary differences. While financial reporting recognizes gains immediately, tax purposes only recognize them upon sale. This discrepancy results in a deferred tax liability that decreases when the investments are sold and gains are recognized for tax purposes.

2. What is the difference between DTA and DTL?

Deferred Tax Assets (DTA) are potential future tax benefits resulting from temporary differences, recorded as assets on the balance sheet. They can be utilised to reduce taxable income or taxes payable. Deferred Tax Liabilities (DTL) are potential future tax obligations resulting from temporary differences, recorded as liabilities on the balance sheet, representing estimated future tax payments when the temporary differences reverse.

3. What is deferred tax in P&L?

Deferred tax liability does not appear as a separate line item in the Profit and Loss (P&L) statement. It is reflected indirectly in the tax expense figure reported in the P&L statement, representing potential future tax obligations arising from temporary differences between accounting and tax treatments.

4. What is the benefit of DTL?

DTL enables a company to acquire financial backing through tax deferral. Adjourned tax payments grant a corporation the capacity to hold onto and exploit the funds for alternate objectives, such as augmenting business expansions, repaying debts, or covering operative outlays. Effective use of available funds is essential in helping companies improve cash flow and financial flexibility.