If accelerated depreciation for tax purposes occurs in the early years and straight-line depreciation is used for books, what happens to Deferred Tax Liability (DTL) over time?

If accelerated depreciation for tax purposes occurs in the early years and straight-line depreciation is used for books, what happens to Deferred Tax Liability (DTL) over time?

• A. DTL decreases in early years and increases later
• B. DTL increases in early years and decreases later
• C. DTL remains constant
• D. DTL becomes a Deferred Tax Asset

Answer: (B)

When tax depreciation is accelerated relative to book depreciation, the tax deductions occur earlier than the accounting expense. That makes current taxable income (and thus current tax expense) lower in the early years than book income would suggest. The result is a timing difference that creates a deferred tax liability: taxes that will be higher in the future to reverse the early benefit. As the asset ages and tax depreciation falls below the book depreciation, the difference reverses. The deferred tax liability therefore decreases over time, eventually fading away once the temporary difference is fully settled. This is not a deferred tax asset, since the timing difference points to future tax obligations rather than a future refundable amount.

When tax depreciation is accelerated relative to book depreciation, the tax deductions occur earlier than the accounting expense. That makes current taxable income (and thus current tax expense) lower in the early years than book income would suggest. The result is a timing difference that creates a deferred tax liability: taxes that will be higher in the future to reverse the early benefit.

As the asset ages and tax depreciation falls below the book depreciation, the difference reverses. The deferred tax liability therefore decreases over time, eventually fading away once the temporary difference is fully settled. This is not a deferred tax asset, since the timing difference points to future tax obligations rather than a future refundable amount.