Deferred tax liabilities and assets with examples

A deferred tax example makes the idea concrete. This guide follows one machine through five years, showing how a deferred tax liability builds while tax depreciation runs ahead, then reverses, and why total tax expense still equals the tax rate on accounting profit.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Deferred tax is the tax that will be payable or recoverable in future because an asset's or liability's carrying amount differs from its tax base. A deferred tax liability arises when tax deductions come before accounting expenses, such as accelerated tax depreciation; a deferred tax asset arises when they come after, such as provisions deductible only when paid. The deferred tax calculation is the temporary difference multiplied by the tax rate expected when it reverses: here a CU 100,000 asset depreciated for tax over 2 years and in the accounts over 5 years gives a deferred tax liability that peaks at CU 15,000.

At a glance

Deferred tax liability
Tax payable later
Deferred tax asset
Tax recoverable later
Calculation
Temporary difference x tax rate
Rate
Expected when the difference reverses
Discounted
Never
Excel
Deferred tax calculator
Deferred tax liabilities and assets with examplesDeferred tax liability: Tax payable later; Deferred tax asset: Tax recoverable later; Calculation: Temporary difference x tax rate; Rate: Expected when the difference reverses; Discounted: Never; Excel: Deferred tax calculator.KEY FACTS AT A GLANCEDeferred tax liabilities and assets with examplesDeferred tax liabilityTax payable laterDeferred tax assetTax recoverable laterCalculationTemporary difference xtax rateRateExpected when thedifference reversesDiscountedNeverExcelDeferred tax calculatorChecked against official sourcesTax BakersDeferred tax liabilities and assets with examplesDeferred tax liability: Tax payable later; Deferred tax asset: Tax recoverable later; Calculation: Temporary difference x tax rate; Rate: Expected when the difference reverses; Discounted: Never; Excel: Deferred tax calculator.KEY FACTS AT A GLANCEDeferred tax liabilities andassets with examplesDeferred tax liabilityTax payable laterDeferred tax assetTax recoverable laterCalculationTemporary difference x tax rateRateExpected when the difference reversesDiscountedNeverExcelDeferred tax calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

Why does deferred tax exist?

Accounting profit and taxable profit recognise some items in different years. Without deferred tax, a company whose tax depreciation runs ahead of accounting depreciation would show a low tax charge now and a high one later, even though its accounting profit was steady. Deferred tax matches the tax charge to the accounting profit it relates to.

A deferred tax example: accelerated tax depreciation

A company buys a machine for CU 100,000. It depreciates it over 5 years in its accounts, using the straight-line method (see depreciation methods), but claims tax depreciation over 2 years. The tax rate is 25%.

Year endCarrying amountTax baseTemporary differenceDeferred tax liabilityDeferred tax expense
180,00050,00030,0007,500+7,500
260,000060,00015,000+7,500
340,000040,00010,000-5,000
420,000020,0005,000-5,000
50000-5,000
Deferred tax liability at each year endDeferred tax liability at each year end7,500Year 115,000Year 210,000Year 35,000Year 40Year 5Deferred tax liability (CU)
The liability builds while tax depreciation is ahead, then reverses to nil.

In years 1 and 2 the company pays less current tax, because tax depreciation of CU 50,000 exceeds accounting depreciation of CU 20,000, and records a deferred tax expense instead. From year 3 it pays more current tax and the liability unwinds. Each year, current plus deferred tax equals 25% of the accounting profit related to the machine.

How does a deferred tax asset arise?

The other way round. A company records a warranty provision of CU 10,000, deductible for tax only when the repairs are paid. The provision's carrying amount is CU 10,000 and its tax base is nil, giving a deductible temporary difference and a deferred tax asset of CU 2,500 at 25%, provided future taxable profit is probable. See recognising deferred tax assets.

What are the journal entries?

YearEntryCU
1Dr Deferred tax expense, Cr Deferred tax liability7,500
3Dr Deferred tax liability, Cr Deferred tax expense (credit)5,000

How do you do a deferred tax calculation for a whole company?

  1. List every asset and liability with its carrying amount and tax base.
  2. Calculate each temporary difference and classify it as taxable or deductible.
  3. Apply the exceptions, such as goodwill and the initial recognition exemption.
  4. Multiply by the expected tax rate.
  5. Test deferred tax assets for recoverability.
  6. Compare with the opening balance: the movement is the deferred tax expense or credit, split between profit or loss, OCI and equity.

The Deferred tax calculator (Excel) follows these steps, and includes this machine on its tax depreciation sheet.

How is deferred tax presented?

Deferred tax assets and liabilities are always non-current on the balance sheet. They are offset only when the company has a legally enforceable right to set off current tax assets against current tax liabilities and they relate to taxes levied by the same tax authority, on the same taxable entity or on entities that intend to settle net. A group with companies in several countries usually shows both a deferred tax asset and a deferred tax liability.

What about deferred tax on revaluations?

If a company revalues land to fair value but tax is based on original cost, the revaluation creates a taxable temporary difference. The deferred tax goes to other comprehensive income, alongside the revaluation gain, not to profit or loss. The rate used depends on how the company expects to recover the asset: through use or through sale, which can attract different tax rates.

Common mistakes

  • Providing deferred tax on permanent differences, such as non-deductible fines.
  • Using the current rate when a different rate has been enacted for the reversal years.
  • Recognising all deferred tax movements in profit or loss when some relate to OCI.

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Questions people ask

What is deferred tax?

The future tax effect of differences between the carrying amounts of assets and liabilities and their tax bases.

How do you calculate deferred tax?

Multiply each temporary difference by the tax rate expected to apply when it reverses, then test any deferred tax asset for recoverability.

What causes a deferred tax liability?

Tax deductions taken before the related accounting expense, or income recognised in the accounts before it is taxed, such as accelerated tax depreciation.

What causes a deferred tax asset?

Expenses recognised in the accounts before they are deductible, such as provisions, and unused tax losses.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 12 Income Taxes

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 12Temporary differences and tax base under IAS 12IAS 12Recognising deferred tax assets and tax lossesIAS 12IAS 12 income taxes explained

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This guide is general information. It is not tax or legal advice for your situation.