When a firm is expensing an item faster on the tax return than on the financial statements,a deferred tax liability is the result.

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Quizplus · Accepted Answer

This is because the faster tax depreciation expense reduces taxable income and therefore results in lower taxes paid in the current period. However, the slower depreciation expense reported on the financial statements will result in higher income and higher taxes in the future. The deferred tax liability represents the amount of taxes that will be paid in the future as a result of this temporary difference in expensing.

When a Firm Is Expensing an Item Faster on the Tax