Menu Close

Deferred Income Taxes Definition

Definition

Deferred tax would be the accounting period used to refer to situations where the tax expense and the tax payable aren’t similar. Earning taxes are recorded to the balance sheet as a liability.

Explanation

Deferred taxes occur whenever there’s a gap between your bookkeeping way of calculating income tax expenditure, and also the IRS way of calculating taxes payable. The gap between both of these tax calculations leads within a inter-period revenue tax allocation.

Deferred tax would be your bookkeeping category which recognizes that the gap between taxation payable and taxation expenditure. Since deferred taxes really are a placeholder for another tax duty of the business, it seems like a liability to the provider ‘s balance sheet.

Example

Company A enters into an agreement that ends in a tax liability of $1,000,000. IRS rules, but say that just 75 percent of their 1,000,000 is expected in Year 1 and the remaining will be paid in Year two. The taxes payable Year is $750,000, and a deferred tax liability of $250,000 is generated.