Is Deferred Income Tax a Current Liability?

Determining owed income tax can be a straightforward process. If you’re an employed individual, you receive a W-2 form, then file it with a Form 1040 to the IRS by April 15 (most years).

But if you own a business, calculating taxes owed can be more complex. This is the case when it comes to deferred income tax. For one thing, deferred tax can be an asset (it means you’re owed tax money  but won’t receive it just yet). Or it can be a liability, meaning you owe that tax to creditors at some point in the future.

But is deferred income tax a current liability? More often than not, no. The following explains why this is the case. 

The IRS versus GAAP

Deferred tax happens when there are temporary differences between “book” tax and actual income tax. In other words, deferred tax represents the difference between income recognition (per the IRS) and a company’s accounting methods (per Generally Accepted Accounting Principles, or GAAP). 

Here’s how this works:

• GAAP accounting mandates the calculation and disclosure of economic events in a precise manner. GAAP income is generally used to calculate tax expenses
• The IRS tax code offers specified rules on the treatment of events. This can result in net income computations that differ from GAAP calculations.

These two methods can sometimes result in a gap between the amount of reported taxes and the amount of taxes to be paid. In other words, deferred income tax. These owed taxes are reported as a liability on a balance sheet. Once the taxes are paid, that liability disappears.

Defining Current Liabilities

Now let’s talk about current liabilities. In accounting language, liabilities represent an obligation to pay a person or entity. When that obligation is dealt with by transferring goods, money, or services to that person or entity, the liability goes away.

Liabilities can include the following:

• Accounts payable
• Deferred revenue
• Interest payable
• Wages payable

As mentioned above, deferred income tax is also a liability.

Now, liabilities are typically divided into two types: Current and long-term. Here’s the difference:

• Current liabilities are paid back within a 12-month period
• Long-term liabilities (also called non-current liabilities) represent debts and payables that extend beyond 12 months

Dealing with Deferred Taxes

We mentioned above that deferred income taxes are generally reported as a long-term liability rather than a current liability. This is because these taxes aren’t typically paid within a 12-month period. There are, of course, exceptions. As such, it’s always a good idea to check with an accountant or tax professional when determining where deferred income tax should be placed on a balance sheet.