Deferred Income Tax Definition
A deferred income tax is a tax (liability) that appears on a company’s balance sheet that is due for the current period buy is yet to be paid. This type of tax is a portion of a company’s taxable income for a current year which is yet to be paid.
A deferred income tax is an unpaid tax that is recorded on a company’s balance sheet resulting from divergence in the accounting techniques used by the company detailed in the generally accepted accounting principles (GAAP), and the tax law of the state. The deferral is as a result of variance in the time tax was due and the time it was paid.
A Little More on What is Deferred Income Tax
Usually, the accounting method used by a company for recording financial statement is that outlined in the generally accepted accounting principles (GAAP). In the United States, the Internal Revenue Service (IRS) levy income tax on firms and individuals using specific accounting rules and tased on the tax code. A difference in the rule used by the IRS and the method used by a firm (GAAP) can create a deferred income tax.
The difference in the accounting methods can also create a difference in the payable income tax and the total reported expenses of a firm. A deferred income tax is regarded as a liability because such tax will still be paid by the income, in most cases, the firm is liable to pay more income tax.
Deferred Income Tax Variations
The IRS calculates depreciation differently from GAAP despite that here are several depreciation methods highlighted in the generally accepted principles. While companies calculate their taxable income and tax returns using GAAP methods, the IRS uses different depreciation practices.
Due to the difference in the depreciation methods used by the IRS and that of GAAP, deferred income tax occurs. A deferred income tax is a liability that is recorded on a company’s balance sheet. This liability can either be current (short-term), which is expected to be paid with 12 months or long-term which is above a year.