Financial Glossary
Deferred Tax
Deferred tax is the tax effect of temporary differences between how income and expenses are recognized for financial-reporting purposes versus tax purposes. These timing differences create deferred tax liabilities (taxes expected to be paid in the future) or deferred tax assets (future tax benefits, such as carryforward losses). It is generally calculated by applying the applicable tax rate to the temporary difference between an item's book value and its tax basis.
Problem & Application
Deferred tax most often surfaces when depreciation, deferred revenue, or accrued expenses are treated differently on the books than on a return. A short-term-rental or hospitality operator who takes accelerated depreciation on a property, for example, may show a deferred tax liability because the tax deduction is front-loaded while book depreciation is spread out. Getting deferred tax right keeps the balance sheet accurate and prevents surprises when those timing differences reverse.
In Short
Deferred tax reconciles the gap between book and tax treatment, signaling taxes a business will owe or recover in future periods.