Many companies report different amounts of income on their income statement and on their income tax return. This difference occurs because the definition of income is not the same under GAAP (generally accepted accounting principles) and federal income tax regulations. GAAP requires income tax expense to be calculated on income before taxes on the income statement while the tax return calculates taxes due based on taxable income per the income tax return.
If the differences are considered temporary, in other words, if certain revenues and/or expenses are reported in different years in income statements and on income tax returns, an asset or liability called deferred income tax exists. If deferred income tax represents the portion of the income tax expense that will be paid in future years, a long‐term liability called deferred taxes is recorded on the balance sheet.