Deferred Tax

Okay kiddo, let me tell you about something called deferred tax. When someone earns money or makes a profit, they have to pay taxes on it to their government. But sometimes, the amount of taxes they owe is different than the amount they actually pay right away. This is called deferred tax.

Imagine you have a jar where you put your allowance money each week. You know that when you take out the money, your mom or dad will ask you to give them some of it as a savings. This is like taxes. But maybe some weeks you don't need to get any money out of the jar, so you don't have to pay any taxes yet. This is like deferred tax.

When a company makes money, they have to pay taxes on that money too. But sometimes, they can't pay all the taxes right away because they have to use some of that money to invest in things like new equipment or expanding their business. So, they "defer" or delay paying some of the taxes until a later time.

But how do they know how much deferred tax they owe? Well, the company has to make some guesses about how much taxes they will owe in the future. They do this by looking at the things they spent money on and the rules the government has about taxes. This is like you knowing that you should always save some of your allowance money for when you want to buy a toy or go on a trip.

So, deferred tax is like a savings account that companies have to pay their taxes later, but they have to guess how much they'll owe in the future.