Question: Deferring the payment of an income tax liability does not save a company any money. This process
merely delays recognition for tax purposes until a later period. Payment is put off for one or more years. If no tax
money is saved, why do companies seek to create deferred income tax liabilities? Why not just pay the income tax
now and get it over with?
Answer: delaying the mailing of an income tax check to the government allows a company
to make use of its money for a longer period of time. When the cash is paid, it is gone and provides no further
benefit to the company. As long as the money is still held, it can be used by management to buy inventory,
acquire securities, pay for advertising, invest in research and development activities, and the like. Thus, a common
business strategy is to avoid paying taxes for as long as legally possible so that more income can be generated
from these funds before they are turned over to the government.