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What is the journal entry to record a deferred tax liability?

A deferred tax liability occurs as a result of a temporary difference between taxable income and financial income under U.S. GAAP. A deferred tax liability is when financial income is greater than taxable income, which means that the entity pays a lower tax amount now and will have higher taxes in the future.

As the visual below illustrates, when a company has a deferred tax liability, current income tax expense is a debit for the amount of tax the company expects to pay, which is based on taxable income. The other debit is to income tax expense deferred, which is the amount of income tax that will need to be paid in future periods. The offsetting credit is to the deferred tax liability and the income tax payable. In the subsequent year when the deferred income tax is paid, the deferred tax liability reverses and is eliminated from the balance sheet.

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  • Does a deferred tax liability result in future tax savings or future tax expense?

    A deferred tax liability results when you are paying less tax now than you will in the future. Therefore, a deferred tax liability means that you will incur higher tax expense in the future.

  • What is a deferred tax liability?

    A deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid. This will exist if future tax accounting income is less than future financial accounting income. Another way of expressing deferred tax liabilities can be “if your taxable income (tax return income) is less today (aka you are paying less tax today)”. This means that your tax deductions are greater today (and your taxable income is reduced), while your tax expenses would be less today, and would be recognized on the income statement at a later date. This would result in a deferred tax liability because you will be able to expense less taxes on the income statement at a later date.