One common situation that gives rise to deferred tax liability is depreciation of fixed assets. Tax laws allow for the modified accelerated cost recovery system (MACRS) depreciation method, while most companies use the straight-line depreciation method for financial reporting.

The temporary differences are the differences between the carrying amount of an asset and liability and its tax base. Tax base is the value of an asset or liability for the tax purposes. The tax base of a liability is usually its carrying amount less amounts that will be deductible for tax in the future. The tax base of an asset is the amount that will be deductible for tax purposes. The carrying values of assets and liabilities are not always the same as tax bases. It is believed that the liabilities will be settled and the assets will be recovered eventually over time and at that point of time their tax consequences will crystallize.

> Deferred tax Liability and items come under deferred tax liability **--'Deferred Tax Liability** --An account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. --The temporary differences between tax accounting and financial accounting appear when there are differences between the taxable income and the pretax financial income or when the bases of assets or liabilities differ for financial accounting and tax purposes. Because these differences are temporary and a company expects to settle its tax liability in the future, it records a deferred tax liability, which is the increase in taxes payable in the future. --The carrying values of assets and liabilities are not always the same as tax bases. It is believed that the liabilities will be settled and the assets will be recovered eventually over time and at that point of time their tax consequences will crystallize. --Two types of temporary differences can arise i.e. taxable temporary difference and deductible temporary difference. --The taxable temporary difference results in the payment of taxes when the carrying amount of a liability is settled or the carrying amount of an asset is recovered. Taxable temporary differences give rise to deferred tax liabilities. A deferred tax liability arises --A deferred tax assets arises •If the carrying value of an asset is less than its tax base OR •If the carrying value of a liability is greater than its tax base

DEFINITION of 'Deferred Tax Liability' An account on a company's balance sheet that is a result of temporary differences between the company's accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year The temporary differences between tax accounting and financial accounting appear when there are differences between the taxable income and the pretax financial income or when the bases of assets or liabilities differ for financial accounting and tax purposes. Because these differences are temporary and a company expects to settle its tax liability in the future, it records a deferred tax liability, which is the increase in taxes payable in the future. One common situation that gives rise to deferred tax liability is depreciation of fixed assets. Tax laws allow for the modified accelerated cost recovery system (MACRS) depreciation method, while most companies use the straight-line depreciation method for financial reporting. Consider a company with a 30% tax rate that depreciates an asset worth $10,000 placed in service in 2015 over 10 years. In the second year of the asset's service, the company records $1,000 of straight-line depreciation in its financial books and $1,800 MACRS depreciation in its tax books. The difference of $800 represents a temporary difference, which the company expects to eliminate by year 10 and pay higher taxes in the future. The company records $240 ($800 × 30%) as a deferred tax liability on its financial statements. Differences in revenue recognition give rise to deferred tax liability. Consider a company with a 30% tax rate that sells a product worth $10,000, but it receives payments from its customer on an installment basis over the next five years with $2,000 annual payments. For financial accounting purposes, the company recognizes the entire $10,000 revenue at the time of the sale, while it records only $2,000 based on the installment method for tax purposes. This results in an $8,000 temporary difference that the company expects to liquidate within the next five years. The company records $2,400 ($8,000 × 30%) in deferred tax liability on its financial statements