Deferred tax liability is created by which of the following?

Deferred tax liability is created by which of the following?

• A. Arises from taxable temporary differences creating future tax payments
• B. Arises from permanent differences
• C. Not recognized in financial statements
• D. Always offset by deferred tax assets

Answer: (A)

Deferred tax liabilities come from taxable temporary differences—differences between the accounting carrying amount and the tax base that will reverse in future periods and lead to higher taxes payable later. When these differences are expected to be taxable when they reverse, a liability for those future tax payments is recognized now. Permanent differences don’t reverse, so they don’t create deferred tax amounts. Deferred tax assets arise from deductible temporary differences and loss carryforwards, not from taxable ones. And while some netting of assets and liabilities is allowed in certain situations, it is not guaranteed that they are always offset.

Deferred tax liabilities come from taxable temporary differences—differences between the accounting carrying amount and the tax base that will reverse in future periods and lead to higher taxes payable later. When these differences are expected to be taxable when they reverse, a liability for those future tax payments is recognized now. Permanent differences don’t reverse, so they don’t create deferred tax amounts. Deferred tax assets arise from deductible temporary differences and loss carryforwards, not from taxable ones. And while some netting of assets and liabilities is allowed in certain situations, it is not guaranteed that they are always offset.