Tax Assets Deferred Explained: Definition, Illustrations
In the world of finance, a deferred tax asset (DTA) is a valuable asset that can provide significant benefits to companies. Think of it as a savings account for future tax obligations, where a company has paid more tax than what is shown on the income statement, and can recover the difference in the future[1][3].
This financial instrument arises due to temporary differences between accounting income and taxable income, such as when tax rules allow for earlier expense recognition than accounting rules or when a company incurs losses that can be carried forward to offset future taxable income[1][3]. These differences create future tax savings because taxes were effectively advanced or overpaid[1].
When a DTA is recognized, it has several implications:
- Future tax payments decrease: The company can use the deferred tax asset to reduce taxable income in coming periods[1].
- On the balance sheet, DTA is recorded as a non-current asset, reflecting the company's right to reduce future tax liabilities[1][3].
- In the income statement, changes in DTA affect income tax expense, either increasing tax benefit or reducing tax expense during the period[2].
It's important to note that tax law changes require companies to remeasure their DTAs using the new tax rates as of the enactment date. This remeasurement impacts income tax expense immediately in the financial statements, affecting reported profits for the period of the change[2].
Transactions that can give rise to deferred tax assets include uncollectible accounts receivable, warranties, leases, inventories, and net operating losses[3]. The deferred tax asset is not reported in the income statement when calculating taxable income[3].
If the deferred tax liability exceeds the deferred tax asset, it is included in the liabilities section of the balance sheet. On the contrary, if the deferred tax asset exceeds the deferred tax liability, it is included in the assets section of the balance sheet[3].
In essence, a deferred tax asset represents a future tax benefit from taxes paid in advance or losses that can reduce taxable income, thereby lowering future tax payments and increasing asset value on the balance sheet, with direct impacts on the income tax expense reported in financial statements[1][2][3].
[1] Investopedia. (2021). Deferred Tax Asset. [online] Available at: https://www.investopedia.com/terms/d/deferredtaxasset.asp
[2] Accounting Coach. (2021). Deferred Tax Assets. [online] Available at: https://www.accountingcoach.com/tax/deferred-tax-assets.htm
[3] Corporate Finance Institute. (2021). Deferred Tax Asset. [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/deferred-tax-asset/
Investing in personal-finance strategies could involve understanding the concept of a deferred tax asset (DTA), which is a non-current asset that can be found on a company's balance sheet, providing a future tax benefit and reducing taxable income in coming periods. Businesses may accumulate a DTA due to temporary differences between accounting income and taxable income, such as when tax rules allow for earlier expense recognition than accounting rules or when a company incurs losses that can be carried forward to offset future taxable income.
