Deferred Tax Liability Explained

By | January 21, 2017

Since taxes are one of those liabilities that are inevitable in the business world, you should know how to deal with the responsibilities that your taxes give you. No business should disregard this matter, that’s why every company has its own company accountant which will ensure that the taxes are well calculated and paid. One of the mistakes though that many companies make is the accumulated deferred tax liabilities that cause further problems as long as they don’t get paid for. But first things first, what is a deferred tax liability? Let’s see what this means.

Wikipedia defines deferred tax as an accounting concept (also known as future income taxes), meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes. We’re talking about the liability here, not the asset, so we’ll also add the breakdown of the term. The words “deferred” describes something delayed, and again “tax liability” is having unpaid financial debt, thus deferred tax liability means unpaid debt that needs to be paid for in the future. Companies sometimes get tax liabilities from financial transactions that are not immediately charged to be paid for. This is what goes down the deferred tax list.

It is still a liability, that’s why it will still be paid for as it when the company pays taxes. Further delay in payment will result in piling up of the tax liabilities until it becomes a problem for the company. That’s why a major role of accountants is to make sure funds are available to pay all tax liabilities on strategically on the same year it was made, rather than pushing it up to the next financial year. One can never be sure of financial stability in the future, that’s why to ensure less burden for the next tax year, there must be no deferred tax liabilities as much as possible. Of course, in order to allocate enough funds for these liabilities, an accountant must be able to calculate the deferred tax liabilities in advance.

As any other financial matter, the computation of the deferred tax liability for a company is really complicated as there are different income sources to be taken into consideration, as well as depreciating asset values and tax deductions. You first need to find the actual taxable income for your company, and then afterwards calculate the total tax liability from this. The formula goes as: Taxable Income x Tax Rate =Total Tax Liability. Obviously, you also need to have a complete and updated federal tax rate for your company to be able to compute it.

As the term itself implies, as long as a tax remains unpaid, it is still a liability. Surely, you are aware that there should be more assets in a company than liabilities in order to run smoothly, and the more liabilities it has, the more problems you are likely to encounter on your operation. Remember that when these liabilities pile up and the business fails to pay all of it, legal problems and litigation will be a major problem for you in the future. You would not want it, would you? And no company would want to stop its operation because of debts and legal problems. That’s why you should never keep liabilities for too long, or it would haunt you.

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