Dictionary

Deferred tax liability

Tax that will be owed later because the company has deducted something for tax purposes sooner than it charged it in the accounts, most often accelerated depreciation.

Tax rules often allow faster write-offs of equipment than accounting rules do. The company pays less tax now and more later, and the gap sits as a liability. For a business that keeps investing, that liability rolls forward indefinitely and behaves like interest-free funding.

Analysts sometimes exclude it from total-debt for exactly that reason, while noting that a company that stops investing will eventually have to pay.

Example: Northwind Tools carries $40M of deferred tax liability arising from claiming accelerated depreciation on its $520M of property-plant-and-equipment. It has grown every year for a decade.

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