When Do Firms Pay Deferred Income Taxes?

Abstract

Deferred tax expense reflects temporary timing differences based on differences between when an item is recognized for accounting purposes and when the same item is recognized for tax purposes. Although in theory temporary differences will reverse, the timing of the reversals are uncertain. On average, deferred income tax expense for most firms is associated with relatively small future cash payments over the two years following deferred tax expense recognition, and a large portion of deferred tax expense does not result in future tax payments in a systematic manner. Firms with high growth in property, plant, and equipment are able to defer income tax indefinitely.