What is Deferred Tax Liability (DTL)?
Deferred tax liability (DTL) is a balance sheet line item that accounts for the temporary difference between taxes that will come due in the future and taxes paid today.
How Does Deferred Tax Liability (DTL) Work?
Because of accrual accounting rules, a company may be able to defer taxes on some of its income. This 'unrealized' tax debt is put into an account on the balance sheet called deferred tax liability.
You can find DTL on the balance sheet or on a fund's statement of assets and liabilities. As the name implies, DTL is on the liability side of the books, along with other long-term debt obligations.
When the tax becomes due (i.e. when it is 'realized'), both the DTL account and the firm's cash account will be reduced by the same amount (since taxes must be paid in cash).
Why Does Deferred Tax Liability (DTL) Matter?
For investors and analysts, the most important question to ask about DTL is, 'will it reverse in the future, and if so, when?' For example, if the DTL is expected to decrease, the company will need to make an actual tax payment to the government and its cash account will decrease.
In general, the difference between taxes owed and taxes paid will reverse themselves over time. Only in rare cases will DTL persist or grow.
