A timing difference has a future
Morrow Bikes bought a $100 wheel-truing machine last January. After one year the Snapshot (balance sheet) carries it at $80. The tax return has already deducted $40, so its tax basis is $60. Twenty dollars of that machine has been deducted on one clock and not yet on the other, and the tax authority has not forgotten.
Deferred tax is the future tax consequence of today's Snapshot balances. A deferred tax liability (DTL) stands for future taxable amounts. A deferred tax asset (DTA) stands for future deductible amounts, or an eligible loss carryforward, subject to recognition and recoverability rules. A DTL is not tax owed next month. A DTA is not cash coming back soon. Both are the which-clock question, written onto the Snapshot as a claim.
Faster tax depreciation builds a liability
The books expect to recover $80 from the machine, through use or sale. The return has only $60 of deductions left. So $20 of future recovery has no deduction left to shelter it, and will be taxed when it arrives. At an assumed enacted rate of 25%, the taxable temporary difference gives a DTL of 20 × 25% = $5, ignoring the special exceptions.
- Carrying amount to recover$80
- Tax basis still deductible$60
- Taxed later: DTL of 5 at 25%$20
The intuition is timing. Morrow used $20 of deductions earlier than the book expense, so current tax was lower this year and fewer deductions remain. As the book and tax bases converge, the temporary difference reverses and the DTL unwinds.
On the Snapshot the DTL sits with the liabilities: the tax authority's claim, which arrives as the machine is used up. Under US GAAP, deferred tax balances are shown as noncurrent. The special exceptions are narrow but real: no DTL is booked on acquired goodwill that is not deductible for tax, and, in some cases, none on undistributed earnings of foreign subsidiaries.
A future deduction builds an asset
Now the mirror image. Morrow books a $20 warranty liability for the free re-fixes it has promised, expensing it now. The tax rulebook deducts warranty costs only when they are paid. The books expensed early, so the return will deduct later, which leaves a future $20 deduction. If that deduction is expected to be usable and the other recognition criteria hold, it gives a DTA of 20 × 25% = $5.
- The return ran first: $40 deducted, $20 book expense
- Carrying amount 80 above tax basis 60
- Future taxable amount 20
- DTL = 20 × 25% = 5
- The books ran first: $20 warranty expensed, not yet deducted
- Book liability 20, tax basis 0
- Future deductible amount 20
- DTA = 20 × 25% = 5, if recoverable
An asset has a book carrying amount of $120 and a tax basis of $90. Assume a taxable temporary difference with no exception and a 30% enacted rate. What is the DTL?