Deferred Tax Liability (DTL)
Definition
A deferred tax liability represents taxes that are owed economically but not yet payable in cash, arising when book (GAAP) pre-tax income exceeds taxable income due to temporary timing differences. The classic driver is accelerated tax depreciation: the company deducts more depreciation on its tax return early on, paying less cash tax now but more later as the difference reverses.
Conceptually, DTL equals the cumulative temporary difference times the tax rate. It sits on the balance sheet as a liability and unwinds over time as book and tax treatments converge.
DTLs also arise in M&A: when acquired intangibles and other assets are written up for book purposes but not for tax purposes (typical in stock acquisitions), a DTL is created on the new write-ups because the extra book D&A will not be tax-deductible.
Why interviewers ask
DTLs show up in two interview settings: statement mechanics (accelerated depreciation creates a DTL and a cash tax benefit today) and purchase accounting ("why does an asset write-up create a DTL?"). The trap is reversing the direction — a DTL means you paid LESS cash tax than book tax expense now, and will pay more later.
Related terms
Interviews don't test definitions — they test recall under pressure.
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