Deferred income tax is a liability that a company must pay in the future due to temporary differences between the company's accounting and tax carrying values, the anticipated tax rate, or changes in tax laws. In simpler terms, it's the tax a company owes but has not yet paid.
While the above definition provides a basic understanding, let's delve deeper into the concept of deferred income tax. It arises because of the difference in timing between when transactions are recognized by the accounting system and when they're recognized by the tax system. This difference is referred to as temporary difference.
There are two types of deferred taxes: deferred tax liabilities and deferred tax assets. If a company anticipates more taxes in the future due to these differences, it's a deferred tax liability. If the company expects to have lower taxes in the future, it's a deferred tax asset.
Deferred income tax provides a more accurate picture of a company's future tax liability or benefit. However, it's important to note that it's an estimation, and the actual tax in the future can vary depending on changes in tax regulations, company's profitability, and other factors.
In Ford's case, deferred income tax could arise from depreciation methods used for tax purposes being different from those used for accounting purposes. For example, if Ford uses an accelerated depreciation method for tax and straight-line method for accounting, it would create a temporary difference, resulting in deferred tax.
For Apple, deferred income tax could come from revenue recognition methods. If Apple recognizes revenue for some products for accounting purposes before it can recognize them for tax purposes, it would create a temporary difference, leading to deferred tax.
Amazon could have deferred tax because of inventory valuation methods. If inventory is valued using the LIFO (Last-In, First-Out) method for tax and the FIFO (First-In, First-Out) method for accounting, it would create a temporary difference, resulting in deferred income tax.