Posted by roysten > 2014-02-20 18:36 | Report Abuse

I find that the deferred tax explanation and examples from fool's website to be easiest to understand:
http://www.fool.com/investing/general/2007/01/09/understanding-deferred-tax-assets.aspx
http://www.fool.com/investing/general/2007/01/12/understanding-deferred-tax-liabilities.aspx

Here is an excerpt:

... a deferred tax asset (DTA) is a future tax benefit. We like those. A DTA is created when shareholder income (what the company tells you) is less than taxable income (what Uncle Sam sees). A DTA is kind of like a prepaid tax.

Quick example
What are some events that result in DTAs? Warranties, restructuring charges, net operating losses, and unrealized security losses can create future tax benefits. For example, companies like Circuit City (NYSE: CC ) and Motley Fool Stock Advisor recommendation Best Buy (NYSE: BBY ) sell a ton of electronics that come with multi-year warranties. Every year, these companies make estimates on their future warranty expenses based on how many returns they think they'll get. The company tells you, the shareholder, these estimates, and expenses them, thus decreasing shareholder income (and shareholder taxes). However, Uncle Sam says that warranty expenses cannot be recognized until the actual event occurs, and as a result, shareholder income is lower than taxable income. Thus, Best Buy, until the item return actually occurs, has to report higher income (and pay higher taxes) to Uncle Sam then to you. This results in a deferred tax asset, because Best Buy "prepaid" these warranty taxes and will receive a future benefit (lower taxes) when the warranty event actually occurs.

When companies delay their tax payments, they create deferred tax liability accounts (DTLs) to reflect future tax obligations. The most common reason for DTLs is depreciation. When a company buys property, plant, or equipment (PP&E), it makes assumptions that either depreciate (reduce the value of) this PP&E slowly or quickly. To you, the shareholder it's trying to impress, the company depreciates slowly, showing you higher income. For the taxman, the company accelerates depreciation, which lowers income and tax payments.

As another example, Berkshire Hathaway (NYSE: BRKa ) is sitting on some pretty hefty future capital gains taxes, thanks to astute stock purchases. Berkshire's stake in American Express (NYSE: AXP ) , as of the most recent annual report, had a cost basis of $1.3 billion, but it's currently worth nearly $9 billion. The gain of $7.7 billion is taxable, and if we assume that, upon the sale, Berkshire will have to pay a 35% capital gains tax on its windfall, we'd have to set up a $2.7 billion deferred tax liability to reflect Berkshire's potential future tax payments. However, because Berkshire may never sell, the DTLs on these long-term holdings occupy some sort of netherworld between equity (what Berkshire owns) and liability (what it owes).