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Deferred income taxes

Temporary differences between book and tax, deferred tax assets and liabilities, and the valuation allowance, with Costco, Home Depot, Coca-Cola, IBM and AbbVie.

The short answer

Deferred income taxes arise when the amount a company reports for an asset or liability in its financial statements differs from the amount that has already been taxed, or will be taxed, on a tax return. Those gaps are called temporary differences. They produce deferred tax assets (future tax relief) or deferred tax liabilities (future tax to pay), which appear on the balance sheet and are explained in the income-tax note. A valuation allowance reduces a deferred tax asset when the company concludes it is more likely than not that some or all of the asset will not be realized.

Temporary differences

Book income and taxable income are not always the same in a given year. Depreciation methods, revenue timing, warranty reserves and many other items can hit the financial statements in one period and the tax return in another. Costco's 10-K for the year ended August 30, 2026 states that deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases, credits and loss carry-forwards. Home Depot's 10-K for the year ended February 1, 2026 and Coca-Cola's 10-K for the year ended December 31, 2025 use the same idea, calling those gaps temporary differences between book basis and tax basis.

Source: Costco 10-K for fiscal 2026, filed Oct 7, 2026 · Home Depot 10-K for fiscal 2025, filed Mar 18, 2026 · Coca-Cola 10-K for fiscal 2025, filed Feb 20, 2026

A deferred tax liability means the company has already recorded income for book purposes that will be taxed later, or has taken a tax deduction earlier than the matching book expense. A deferred tax asset means the opposite: a deduction or credit that will reduce taxes in a later period, including loss and credit carry-forwards. The balances are measured using the enacted tax rates expected to apply when the difference reverses. The current year's income-tax expense on the income statement includes both taxes currently payable and the change in these deferred balances. Effective tax rate explains how the total tax expense compares with pre-tax book income.

The valuation allowance

A deferred tax asset is only useful if the company will have enough taxable income, of the right type and in the right jurisdiction, to use it. AbbVie's 2025 10-K describes the test as whether it is more likely than not that all or a portion of a deferred tax asset will not be realized. If that is the conclusion, the company records a valuation allowance that reduces the asset. IBM's 2025 10-K says that, in assessing the need for a valuation allowance, management considers all available evidence for each jurisdiction including past operating results, estimates of future taxable income and the feasibility of ongoing tax planning strategies/actions.

Source: AbbVie 10-K for fiscal 2025, filed Feb 20, 2026 · IBM 10-K for fiscal 2025, filed Feb 24, 2026

A large or rising valuation allowance can mean the company does not expect to use some of its tax attributes soon. A release of an allowance, if it happens, reduces tax expense in the period of the change. Both movements are usually discussed in the income-tax note and, when they are large, in the MD&A.

Common questions

What is a temporary difference?

A gap between the carrying amount of an asset or liability in the financial statements and its tax basis, which will reverse in later periods. Costco, Home Depot and Coca-Cola each describe deferred tax assets and liabilities as the future tax effects of those differences.

What is a deferred tax asset?

An amount that represents future tax relief: a deduction, credit or loss carry-forward that is expected to reduce taxes payable later. It sits on the balance sheet, often net of a valuation allowance.

What is a deferred tax liability?

An amount that represents taxes expected to be paid in the future when a temporary difference reverses, for example when accelerated tax depreciation catches up with book depreciation.

What is a valuation allowance?

A reserve that reduces a deferred tax asset when it is more likely than not that some or all of the asset will not be realized. IBM describes the evidence management considers; AbbVie states the 'more likely than not' test.

Where is this in the 10-K?

On the balance sheet (deferred tax assets and liabilities, sometimes split current and non-current or presented as a net amount) and in the income-tax note, which usually includes a rate reconciliation and a roll-forward of the valuation allowance.

Disclosures

Editor holdings: The editor holds no position in any company named on this page. As of Nov 11, 2026.
Compensation: Nobody paid for this page. No affiliate links on this page.
Sources: Each company's own SEC filings, linked next to each number.
Last updated: Nov 10, 2026

General education, the same for every reader. Not a recommendation to buy, sell or hold any security, and it doesn't consider your situation.

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