What is a deferred tax liability, and where does it come from?

A deferred tax liability is tax a company has expensed on its income statement but hasn't paid yet. It comes from timing differences between the books a company keeps for investors and the books it keeps for the tax authority. When book income is higher than taxable income today, and that gap will reverse later, the tax on the gap is owed in the future. That goes on the balance sheet as a liability. The usual source is depreciation. Companies often depreciate an asset straight-line for book and on a faster schedule for tax. So in the early years taxable income is lower than book income, and the cash tax paid is lower than the tax expense on the income statement. The difference is the deferred tax liability. It reverses later. Total depreciation is the same on both sets of books, so in later years tax depreciation is lower than book, taxable income is higher, and the company pays more cash tax than it expenses. The liability unwinds to zero by the end of the asset's life. On the statements, the increase in the liability is added back in cash flow from operations, because that part of tax expense wasn't paid in cash.

A deferred tax liability is tax a company has expensed on its income statement but hasn't paid yet. It comes from timing differences between the books a company keeps for investors and the books it keeps for the tax authority. When book income is higher than taxable income today, and that gap will reverse later, the tax on the gap is owed in the future. That goes on the balance sheet as a liability. The usual source is depreciation. Companies often depreciate an asset straight-line for book and on a faster schedule for tax. So in the early years taxable income is lower than book income, and the cash tax paid is lower than the tax expense on the income statement. Take a $100 asset, a 25% tax rate and $100 of income before depreciation. In year one, book depreciation is $20 and tax depreciation is $40. Book pre-tax income is $80, so tax expense is $20. Taxable income is $60, so cash tax is $15. The $5 difference is the deferred tax liability. It's the 25% rate times the $20 of extra tax depreciation. It reverses later. Total depreciation is the same on both sets of books, so in later years tax depreciation is lower than book, taxable income is higher, and the company pays more cash tax than it expenses. The liability unwinds to zero by the end of the asset's life. On the statements, the increase in the liability is added back in cash flow from operations, because that part of tax expense wasn't paid in cash. Two caveats. It's a timing difference, not a permanent saving, although paying later is worth something. And a company that keeps buying assets keeps adding new differences, so the balance can grow for years. Another common source is an acquisition where assets are written up for book but keep their old tax basis.