When an asset’s book value and tax value diverge — commonly from different depreciation methods for books versus tax — that gap creates a deferred tax asset or liability that will reverse in the future.
How it works
Subtracting tax basis from book basis gives the temporary difference; multiplying its absolute value by the enacted tax rate gives the deferred tax amount, classified as a liability if book basis exceeds tax basis, or an asset if the reverse is true.
What this does not include
This does not include a valuation allowance, which companies must record against a deferred tax asset if it’s more likely than not the asset won’t actually be realized — a separate judgment call beyond the basic temporary-difference math shown here.
How to use this calculator
- Enter book basis, tax basis, and the enacted tax rate.
Frequently asked questions
Why does faster tax depreciation create a deferred tax liability?
Faster tax depreciation lowers tax basis below book basis, meaning less tax is paid now but more will be owed later as book depreciation catches up — that future tax obligation is the liability.
What’s a common cause of a deferred tax asset instead?
Net operating loss carryforwards, or expenses recognized for book purposes before they’re deductible for tax purposes (certain accrued liabilities, for example) — future tax savings not yet realized.
Do deferred taxes ever actually get paid or received in cash?
Not directly — they represent future tax effects that will flow through actual cash tax payments as the temporary differences reverse in later periods, rather than being a cash item themselves today.
