Deferred Income Tax

We realize any discussion of income tax can be PTSD triggering. We’ll try to be gentle.

When you pay your income tax, you pay a little at a time (assuming you work as a standard W2-style employee; if you drive for Uber or write mystery novels, you might not relate to this part). Your paycheck comes and a portion of your wages has been withheld. When mid-April rolls along and income taxes are due, you’ve basically paid it. You might owe a little or get a little back, but you essentially pay as you go.

Corporations do things differently. They generally pay in chunks, quarterly or annually. So there can be lag in time between when something taxable happens...and when the company actually sends money in.

That’s where deferred tax comes into play. It represents the amount owed that hasn't been paid yet. The funds have to be set aside on the company’s books, because it’s not really the company’s money at that point. The money's now just waiting to go to the government.