What is a deferred tax asset vs a deferred tax liability?

Deferred taxes exist because companies keep two sets of rules: book accounting for reported financials and tax accounting for the tax authority. When income or expenses are recognized at different times under the two, the company records a deferred tax item to reflect taxes it will pay or save later.

A deferred tax liability means the company has paid less tax so far than its book tax expense implies and will pay more later. The classic example is accelerated depreciation for tax purposes: tax depreciation is higher than book depreciation in the early years, so cash taxes are lower now and the difference reverses later. On the cash flow statement, an increase in a DTL is added back, since book tax expense exceeded cash tax.

A deferred tax asset is the opposite: a future tax saving. Common sources are net operating losses that can offset future taxable income, and expenses such as warranty reserves that hit book income before they are deductible. If it is more likely than not that the company cannot use a DTA, it records a valuation allowance. In M&A, writing up a target's assets in a stock deal creates a new DTL, because book basis rises while tax basis stays the same.