A discount rate is an expected rate of return used to convert a future cash flow into its value today. In tax deferral, it represents the return that could be earned between now and the eventual tax payment. For a tax liability x deferred for T periods, the current value of the deferral is x(1 − (1 + r)^−T). section 14.1.1
A deferred $1,000 tax bill
Assume a $1,000 tax payment is postponed for 20 years and the discount rate is 2%. The deferral is worth about $327.03 today: investing $672.97 at 2% grows it to $1,000, leaving $327.03 available now. The rate can reflect the expected return on the asset holding the tax savings. section 14.1.1
