Deferred Tax Liability Explained. CPA Exam

What is a deferred tax liability, and how does it arise? This FAR-focused income tax lesson explains deferred tax liabilities (DTLs) — how temporary differences between GAAP book income and taxable income create an obligation to pay more tax in the future, how to measure the DTL, and how to record income tax expense with a worked journal entry. Built for accounting students and CPA, CMA and EA candidates studying accounting for income taxes.
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Video Timeline & Key Concepts:
0:00 — Definition of a deferred tax liability
0:40 — Temporary differences between book basis and tax basis
2:07 — Temporary differences as future taxable income
4:07 — Adam Corporation example
6:00 — Computing current taxable income and tax payable
7:31 — Journal entry and calculating income tax expense with the DTL
Frequently Asked Questions:
What is a deferred tax liability?
A deferred tax liability is an obligation to pay more income tax in a future period because income was recognized for book purposes before it becomes taxable.
What causes a deferred tax liability?
A DTL arises from a temporary difference where the book basis of an asset or liability differs from its tax basis, such as recognizing revenue on the accrual basis for GAAP but the cash basis for tax.
How is the amount of a deferred tax liability measured?
The DTL equals the future taxable temporary difference multiplied by the enacted tax rate expected to apply when the difference reverses.
How is income tax expense related to the DTL?
Income tax expense equals the current income tax payable plus the change in the deferred tax liability for the period.
What happens when the temporary difference reverses?
As the temporary difference reverses in future years, the deferred tax liability is drawn down and the deferred amounts become currently taxable.
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