Deferred tax liability for construction contracts

Tax cut

Well-intended desires to instill fairness in the tax system have added to tax system's complexity. The size and composition of the DTL can provide enough ammunition to ask a few questions of its tax advisor. This article will focus on tax techniques that create these sought-after taxable temporary differences related to construction contracts.

Taxable temporary differences give rise to deferred tax liabilities for financial reporting. So deferred tax liabilities that come due are replaced with new additions to the DTL. When reading financial statements, pay close attention to the amount and disclosure of deferred income taxes. If it’s caused by a sizable net operating loss carryforward or a tax credit carryforward, then it probably makes sense.

This results in a net deferred income tax liability, which is indicative that income tax is deferred to later years. This is a common deferral triggered by accelerated and bonus depreciation permitted under the tax code.

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