Deferred Income Tax
What it is:
How it works (Example):
Certain income being realized and accounted for in one accounting period, but not taxable until another. For this reason, the income tax burden associated with this not-yet-taxed sum is reported as a tax liability until paid in the following accounting period.practices and tax laws often result in a portion of a company’s
To illustrate, suppose company XYZ earns $1 million in a given quarter, $850,000 of which is taxable in the current quarter. Due to the manner by which XYZ accounts for income against tax codes, it is not required to pay tax on the remaining $150,000 until the following quarter. As a result, the $150,000 is still reflected on the income statement as part of the $1 million in realized income for the current quarter and the amount of tax on the $150,000 is reflected as a liability on the balance sheet.