Deferred taxes: DTAs and DTLs
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
6 min read · updated October 28, 2026
Deferred taxes are tax a company will pay, or save, in a later year because its income statement and its tax return count some income and expenses in different years.
- A deferred tax liability (DTL) is tax you will pay later. Usually the tax return showed less income than the books did, so the company paid less tax than its income statement records, and the rest comes due later.
- A deferred tax asset (DTA) is tax you will save later. A loss or an expense counts on the return in a future year, and it will cut the tax bill then.
Every deferred tax question, including the tricky acquisition one further down, comes down to one test:
Will the company pay more or less cash tax later? More later is a DTL. Less later is a DTA.
Why the two numbers differ
The tax on the income statement is the book tax (also called the tax provision): the tax rate applied to the profit the company reports to shareholders. The cash tax is what is actually paid, worked out on the tax return under the tax code's rules.
The two differ in most years. Some differences are permanent and never reverse, like a fine that is never deductible. Deferred taxes ignore those. They track only temporary differences: the same income or expense, counted in a different year. A deferred tax balance is not cash sitting anywhere. It is the running total of those timing gaps, and it goes back to zero when the timing catches up.
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Frequently asked
- What are deferred taxes?
- Deferred taxes are tax a company will pay or save in a later year because its income statement and its tax return count some income and expenses in different years. Tax it will pay later is a deferred tax liability; tax it will save later is a deferred tax asset.
- What is the difference between a DTA and a DTL?
- A deferred tax liability means you paid less cash tax than your books show this year, so you owe more later. A deferred tax asset means you will pay less tax in the future, a benefit waiting to be used. Anchor on whether you pay more or less cash tax later.
- Why does an asset write-up in an acquisition create a DTL?
- Because the buyer marks the target's assets up on the books while the IRS often leaves the tax basis alone. The extra book depreciation is never deductible, so the company will pay more cash tax than its books show, and a DTL goes on the opening balance sheet at close. The later years of higher cash tax are that DTL being paid off, not what creates it.
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