Deferred Income Taxes
Deferred income tax is the accounting term used to describe situations where the income tax expense and the income tax payable are not the same. Deferred income taxes are listed on the balance sheet as a liability.
Deferred income taxes occur when there is a difference between the accounting method of calculating income tax expense, and the IRS method of calculating income taxes payable. The difference between these two income tax calculations results in an inter-period income tax allocation.
Deferred income tax is the accounting category that recognizes the difference between taxes payable and tax expense. Since deferred income taxes are a placeholder for a future tax obligation of the company, it appears as a liability on the company’s balance sheet.
Company A enters into an agreement that results in a tax liability of $1,000,000. IRS rules, however, state that only 75% of the $1,000,000 is due in Year 1 and the remainder is to be paid in Year 2. The income taxes payable in Year 1 is $750,000, and a deferred income tax liability of $250,000 is created.