Deferred Tax Liability
Candlefocus EditorFor example, any individual who is eligible to participate in a qualified retirement plan such as a 401(k) is incurring a deferred tax liability in the current period. This is because even though a person is not paying taxes on their earnings or gains at that moment, they will eventually have to pay taxes on them when they withdraw the funds from the plan. Therefore, even though the taxes are not due immediately, they will have to be paid in the future, and that obligation constitutes a deferred tax liability.
The same applies to businesses. Businesses can also be subject to deferred tax liabilities. These are created when a business takes advantage of certain investments that enable them to delay paying taxes until a later date. This could include things such as accounting practices that allow a business to spread out income from expenses over a series of years. As such, the business might not realize the tax burden of expenses at the time of the transaction but will instead recognize them at a later date.
For any individual or business that is facing a deferred tax liability, it is important to keep track of how much is owed and plan for when the taxes must be paid. This is especially important for individuals dealing with retirement plans, as a large deferred tax liability could create a significant burden when taxes are due. With proper planning, however, individuals and businesses can ensure they are able to pay their liabilities on time.