Deferred tax liability

A deferred tax liability is a tax that a business owes but does not have to pay right away.

Homebase Team

Min Read

What is a deferred tax liability?

A deferred tax liability is a tax that a business owes but does not have to pay right away. It’s recorded on the balance sheet when there’s a temporary difference between how income is recognized in a company’s accounting records (financial reporting) versus how it’s treated for tax purposes. In other words, it’s a future tax bill the business expects to pay later.

For small business owners, understanding deferred tax liabilities can help you get a more accurate picture of your company’s long-term financial health. It also helps you better manage cash flow and tax planning strategies—especially if you’re growing quickly or using different accounting methods for taxes and reporting. If you're looking to keep payroll, taxes, and recordkeeping organized in one place, Homebase payroll can help.

How deferred tax liabilities happen

Deferred tax liabilities usually arise when there are differences between tax rules and accounting rules. The most common example is depreciation.

Let’s say you buy equipment for your business. For accounting purposes, you might depreciate it evenly over five years. But the IRS may allow you to deduct a bigger portion of the expense in the first year (using something like the Modified Accelerated Cost Recovery System or MACRS). This creates a temporary difference:

In your books: You show a smaller expense and higher profits in year one.
On your tax return: You claim a larger deduction and pay less tax now.

But since you’ve already taken a big tax break up front, you’ll owe more taxes later—resulting in a deferred tax liability.

Common causes of deferred tax liabilities

Accelerated depreciation – Deducting more now but reporting less expense on financial statements
Revenue recognition timing – Recognizing revenue earlier for accounting than for taxes (or vice versa)
Installment sales – Recording a sale upfront but paying taxes as payments are received
Different expense rules – Some expenses may be deductible for accounting purposes but not immediately deductible for tax purposes

These differences eventually reverse over time, which is why they’re considered "temporary." The business will settle the liability when the timing catches up.

Deferred tax liability vs. deferred tax asset

While a deferred tax liability means you'll pay more tax later, a deferred tax asset means you'll pay less tax in the future. Assets typically arise from things like overpaying taxes, losses that can be carried forward, or expenses recognized for tax but not yet on the books.

Think of it this way:

Deferred tax liability = You got a tax break now, but you’ll owe more later
Deferred tax asset = You paid more or took a loss now, and you'll benefit later

Both are important for showing a more complete picture of your business’s finances.

Why deferred tax liabilities matter for small businesses

Even if you’re not preparing your own tax returns, it’s useful to understand what deferred tax liabilities mean:

They affect your balance sheet – Deferred taxes show up under liabilities, which can influence how investors or lenders view your business.
They impact cash flow – Taking larger deductions now helps free up cash, but it also means you’ll owe more later.
They require long-term planning – If your business grows quickly, deferred taxes can have a significant effect on your tax strategy.

In short, deferred tax liabilities help you better understand what your real tax exposure will be down the line.

How to manage deferred tax liabilities

While your accountant will likely handle the technical aspects, here’s how you can stay on top of deferred tax liabilities as a business owner:

Keep accurate records of depreciation methods and schedules
Understand the tax treatment of large asset purchases or new revenue models
Ask your accountant to explain temporary vs. permanent tax differences
Review your year-end financial statements and tax returns together

Being proactive means fewer surprises and better cash flow forecasting.

When to consult a professional

Deferred tax liabilities can get complex, especially when you’re dealing with:

Multiple types of assets with different depreciation schedules
Changing from cash to accrual accounting
Planning a merger, sale, or new investment

Your CPA or tax professional can help you understand how deferred taxes fit into the bigger picture.

How Homebase helps simplify payroll and tax recordkeeping

Even if you don’t handle accounting tasks yourself, keeping payroll and tax-related data accurate and accessible is critical. Homebase payroll is designed to help small business owners automate the tough stuff, stay compliant, and reduce risk.

With Homebase payroll, you can:

Run payroll automatically and handle tax filings
Generate reports that keep your records clean and audit-ready
Track employee wages, withholdings, and hours
Integrate time tracking with payroll to reduce errors
Keep all your payroll and compliance documents in one secure place

Explore Homebase payroll to streamline payroll, stay organized for tax season, and give yourself more time to focus on what matters most: growing your business.

FAQs

No items found.