Deferred liabilities are a way for taxpayers to pay more taxes in the future, whereas deferred assets are a way for taxpayers to pay less taxes in the future.

Deferred Tax Liability:

This represents taxes that will be paid in the future because of temporary differences when tax deductions are taken before recorded expenses. In the event that a business uses straight-line depreciation in its financial statements but claims bonus depreciation for tax purposes, taxable income may temporarily decrease compared to book income. When book depreciation catches up, the business will be held accountable for taxes, leading to a deferred tax liability.

Deferred Tax Asset:

Future tax savings can be achieved due to temporary differences in the recognition of book expenses before tax deductions. Net operating loss (NOL) that is not fully utilized during the current tax year is a common example. Carrying forward results in a deferred tax asset that allows the company to decrease future taxable income.

In short:

• Future tax payments caused by accelerated deductions today are called deferred tax liability.
• Delayed deductions today result in future tax savings for deferred tax assets.