A tax liability is taxes that are payable to a taxing authority, or which are accrued for payment on a future date. A number of transactions can trigger a tax liability, including the following:
- Realization of operational income
- Receipt of an inheritance
- Sale of an asset
A tax liability is based on a tax rate, which may be either flat rate or an increasing-rate schedule. In the latter case, tax rates are kept low for moderate-income taxpayers, and then increase for higher-income taxpayers. The tax rate may also vary depending on the nature of the related income. For example, the tax rate on capital gains differs from the rate on operational income.
A tax liability is usually considered a short-term liability when it is reported on the balance sheet, since it is payable within one year.
An organization should pay its tax liabilities when due, for the applicable government authorities usually have the right to collect unpaid taxes, and so can place a lien on an entity's assets.