Deferred Income Taxes

Category

Cash Flow

Units

Currency

US-GAAP elements

DeferredIncomeTaxExpenseBenefitDeferredIncomeTaxesAndTaxCredits

Reference

ASC 740, Income Taxes; ASC 230 (operating activities)

Source

Reported in SEC EDGAR filings (US-GAAP XBRL taxonomy)

Deferred income taxes on the cash flow statement is the portion of the period's income tax expense (or benefit) that will be paid (or recovered) in future periods rather than now. Because it is part of the tax expense in net income but involved no cash payment this period, a deferred tax expense is added back in the operating section, and a deferred tax benefit is subtracted.

It arises from temporary differences between when income and expenses are recognized for financial reporting and when they count for tax purposes.

Under ASC 740, total income tax expense has two parts: current tax, which is roughly what the company owes on this year's tax return, and deferred tax, which reflects the change in deferred tax assets and liabilities. The deferred piece is a noncash accrual, so the indirect method in ASC 230 reverses it. Companies usually tag the line DeferredIncomeTaxExpenseBenefit in XBRL, which covers continuing operations. Some use DeferredIncomeTaxesAndTaxCredits when tax credits are combined with the deferred amount.

The most common source of a deferred tax expense is accelerated tax depreciation: a company deducts equipment costs faster on its tax return than in its financial statements, which lowers current taxes and builds a deferred tax liability. Other sources include stock-based compensation, capitalized research costs, and changes in valuation allowances against deferred tax assets. A one-time jump often reflects a change in tax rates or a release of a valuation allowance, which changes the deferred tax balance without any cash effect.

Analysts use this line to understand the gap between reported tax expense and cash taxes. A persistent deferred tax add-back boosts operating cash flow year after year, which is real cash for as long as the company keeps investing. It can reverse, however, if capital spending slows. Cash taxes paid, which companies disclose separately, give the clearest picture.