Deferred tax liability
AccountingTax the company will owe in future because it has already taken a deduction for tax purposes that it has not yet taken in its accounts.
Also written: DTL, deferred tax liabilities
A deferred tax liability arises from a timing difference. The company keeps two sets of numbers, one for shareholders under the accounting rules and one for the tax authority under the tax rules, and the two recognise the same item in different periods.
Accelerated tax depreciation is the standard case. The tax rules let the company write an asset off faster than its accounts do, so early on it pays less cash tax than its book tax expense implies. That saving is real but temporary, and the DTL records the future obligation it created.
The liability unwinds later. Once the asset is fully written off for tax but still depreciating in the accounts, cash tax exceeds book tax and the DTL is drawn down. Over the asset's whole life the two converge, which is why a DTL is a timing item rather than a permanent benefit.
In a transaction it appears again through purchase accounting. Writing assets up to fair value creates book value with no matching tax basis, generating a DTL at completion that has nothing to do with the target's historic operations.
Worked example
An asset costs 500. The accounts depreciate it straight line over ten years at 50 a year; the tax rules allow 100 a year over five.
In year one, tax depreciation exceeds book by 50, so taxable profit is 50 lower and cash tax is 12.5 lower at a 25% rate. A deferred tax liability of 12.5 is recognised.
By year five the DTL has built to 62.5. From year six the asset is fully written off for tax but still depreciating in the accounts, so cash tax now exceeds book tax and the DTL unwinds to zero by year ten.