Definition
Deferred income tax is the accounting term used to describe situations where the income tax expense and the income tax payable are not the same. Deferred income taxes are listed on the balance sheet as a liability.
Explanation
Deferred income taxes occur when there is a difference between the accounting method of calculating income tax expense, and the IRS method of calculating income taxes payable. The difference between these two income tax calculations results in an inter-period income tax allocation.
Deferred income tax is the accounting category that recognizes the difference between taxes payable and tax expense. Since deferred income taxes are a placeholder for a future tax obligation of the company, it appears as a liability on the company's balance sheet.
Example
Company A enters into an agreement that results in a tax liability of $1,000,000. IRS rules, however, state that only 75% of the $1,000,000 is due in Year 1 and the remainder is to be paid in Year 2. The income taxes payable in Year 1 is $750,000, and a deferred income tax liability of $250,000 is created.
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
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The financial accounting term liability is used to describe the debt of a corporation that results from a transaction involving the transfer of an asset or the provision of a service. Liabilities are reported on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
The term income tax is used to describe federal and state tax obligations payable on individual or business income. Income taxes are computed by completing tax forms available from the Internal Revenue Service.Moneyzine EditorNovember 6th, 2024
The term accrued liabilities refers to unpaid expenses resulting from contractual agreements with another party. Accrued liabilities appear as a current liability on a company's balance sheet, and include items such as income taxes, the company's share of payroll taxes, property taxes, and compensated absences.Moneyzine EditorJanuary 3rd, 2024
The financial accounting term interperiod income tax allocation refers to the distribution of income tax expense between accounting periods. This occurs due to a timing difference between taxable income and the accounting income appearing in the company's financial statements.Moneyzine EditorJanuary 22nd, 2024
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