Deferred Tax Liability (DTL) occurs when a company has an obligation to pay taxes in the future due to discrepancies between the way financial accounting and tax accounting recognize income or expenses. For instance, if a company uses accelerated depreciation for tax purposes but straight-line depreciation for its financial statements, it might have lower taxable income initially but higher accounting income. This difference can create a deferred tax liability, as the company postpones some of its tax payment to future periods.

For example, consider a business with a piece of machinery. For financial reporting, the machinery is depreciated evenly over five years, but for tax purposes, the accelerated method results in higher deductions in the early years. This results in lower taxes today but creates a need to settle those taxes later, which we call Deferred Tax Liability.

Understanding DTL is essential, as it affects a company’s balance sheet and financial health analysis. Properly accounting and provisioning for it ensures that future liabilities do not surprise stakeholders when they are due.