Definition
A deferred tax liability (DTL) arises when a temporary difference will increase taxable income in future years, such as accelerated tax depreciation. A deferred tax asset (DTA) arises when a difference will reduce future taxable income, such as accrued expenses not yet deductible, or net operating loss carryforwards. Balances equal the temporary difference times the enacted rate expected to apply when the difference reverses. All deferred taxes are classified as noncurrent.
Why it matters in an audit or review
Auditors reconcile temporary differences to the fixed asset, accrual, and tax return schedules, recompute the rates (including state taxes), and evaluate whether DTAs are realizable. Deferred tax is an accounting estimate, so AU-C 540 applies.
Example
(Illustrative) Book basis of equipment is $90,000 and tax basis is $60,000, so the difference is $30,000. At a 25% rate, the DTL is $7,500.
Dr Deferred income tax expense 7,500 Cr Deferred tax liability 7,500
Common mistakes
- Applying the current year rate rather than the enacted rate at reversal.
- Forgetting deferred taxes on acquired intangibles.
- Recording deferred taxes for pass-through entities with no entity-level tax.
Sources
- FASB ASC 740-10-25 and 740-10-30, Income Taxes, recognition and measurement of deferred taxes
- FASB ASC 740-10-45 (as amended by ASU 2015-17), classification of deferred taxes as noncurrent
- AICPA, AU-C Section 540, Auditing Accounting Estimates and Related Disclosures
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error