What is a deferred tax liability (DTL)?

A deferred tax liability (DTL) is essentially a tax expense that a company has recognized in its financial statements but has not yet paid in cash. This concept arises from differences in accounting practices between financial reporting and tax reporting. When a company’s financial income is greater than its taxable income due to timing differences (for example, when revenues are recognized in financial statements before they are taxable), a DTL is created. This means the company will eventually have to pay taxes on this income in future periods, resulting in a liability on the balance sheet.

The recognition of this liability indicates that while the company's current financial accounting reflects higher income, it has not translated into actual cash outflow for taxes at that moment. Understanding DTL is crucial for analyzing a company’s future tax obligations and overall financial health, as it indicates potential cash outflows that will need to be managed down the line.

While a deferred tax liability does reflect an obligation and relates to recognition of tax in the future, it's distinct from merely being a current obligation or a cash payment due. This is why this choice accurately captures the essence of a deferred tax liability.