Deferred income taxes are taxes that a company will eventually pay on its taxable income, but which are not yet due for payment. The difference in the amount of tax reported and paid is caused by differences in the calculation of taxes in the local tax regulations and in the accounting framework that a company uses. Examples of major accounting frameworks are Generally Accepted Accounting Principles and International Financial Reporting Standards.
Any taxes that are payable under the relevant accounting framework, but which are not yet payable under local tax regulations are recorded as a tax liability on a company's balance sheet until such time as they are paid. The tax liability is frequently recorded as a long-term liability in the balance sheet, since there is usually no expectation of paying it within the next 12 months. This means that the deferred income taxes line item generally does not impact short-term liquidity ratios.
For example, a company may use straight-line depreciation to record the depreciation on its fixed assets, but is allowed by tax regulations to use an accelerated depreciation method in its tax return. The result is less taxable income reported on the corporate tax return, which is caused by the increased amount of depreciation expense in the current period. Thus, the company pays fewer income taxes in the current period, even though a higher income tax is indicated in its normal income statement. In later years, when the amount of straight-line depreciation recognized catches up with the amount of accelerated depreciation, the amount of deferred income taxes related to this item will be reduced to zero.