Deferred Tax Liability vs Deferred Tax Asset

What is Deferred Tax Liability?

Deferred tax liability is the notional tax liability that the company is required to compute and disclose in its financial statements as per the applicable regulatory and statutory requirements. Deferred tax suggests that the tax is either paid in advance or has been carried forward, but the treatment of such an advance or carrying forward is yet to be recognized in the profit and loss account. Deferred tax liability is a tax that is payable in the future due to the different treatment in accounting and as per income tax laws on the items of income or expense. The deferred liability arises when, due to a temporary timing difference, the profit tends to go on the higher side when compared with the accounting books than taxable profit as per the applicable provisions of the Income Tax Act....

How Deferred Tax Liability Work?

1. A deferred tax liability is usually formed when payment of taxes is accumulated in a financial year but is due in a subsequent year....

How is a Deferred Tax Liability Created?

1. Tax Rules Allowance: Sometimes tax rules allow companies to increase their future taxable earnings when they face book profits and reduce expenses; this creates a potential tax increment....

Examples of Deferred Tax Liability

A deferred tax liability is a record of tax that has been incurred by the entity but has not been paid and is due. This liability is known as a deferred tax liability. In a case where a business experiences profits during a particular fiscal year, it is liable to pay taxes on the earned profits as per the applicable tax rules and laws. Profits here attract tax liabilities that are to be met by the company at the end of the assessment year....

How is Deferred Tax Liability Calculated?

For example, a company holds an asset with a value of ₹5,00,000. The company uses the straight-line depreciation method in the books of accounts and charges depreciation at the rate of 20%, which comes to ₹1,00,000. Whereas, the income tax laws provide that the depreciation shall be charged at 15%, which stands at ₹75,000. Now the company has to create a DTL of ₹25,000....

Deferred Tax Liability vs Deferred Tax Asset

Basis Deferred Tax Asset (DTA) Deferred Tax Liability (DTL) Definition It refers to the potential tax benefits that a company has earned but is yet to use it. It is the amount of taxes that a company will likely have to pay in the future due to differences between accounting and tax rules. Reasons Arises from tax-deductible items or losses that can be used to reduce taxable income in the future. Arises from taxable items or income mentioned in the financial statements but not yet taxable according to the tax rules. Effect on Future Taxes Reduces future taxable income, leading to lower taxes. The future taxable income increases leading to higher taxes. Type of Balances in Balance Sheet Positive balance on the company’s balance sheet. Depicts a negative balance on the balance sheet of the company. Risk-taking Capacity May encourage companies to take risks and make long-term investments. Depends an obligation that may make companies more cautious about certain financial decisions. So, might or might not take risk. Impact of Timing Difference Reflects a timing difference that results in potential tax savings in the future. Reflects a timing difference that results in higher future tax payments. Example Losses carried forward, tax credits, or deductible expenses not used immediately. Revenue or gains recognized in financial statements but not yet taxed....

Deferred Tax Liability – FAQs

Why do deferred tax liabilities occurs?...