Deferred Tax Asset

AAA

DEFINITION of 'Deferred Tax Asset'

Deferred tax assets are created due to taxes paid or carried forward but not yet recognized in the income statement. Its value is calculated by taking into account financial reporting standards for book income and the jurisdictional tax authority's rules for taxable income. For example, deferred tax assets can be created due to the tax authority recognizing revenue or expenses at different times than that of an accounting standard. This asset helps in reducing the company’s future tax liability. It is important to note that a deferred tax asset will only be recognized when the difference between the loss-value or depreciation of the asset is expect to offset future profit.

Reasons deferred tax assets arise include:

  • Expenses are recognized in the income statement before they are required to be recognized by the taxing authority
  • Revenue is subject to taxes before it is taxable in the income statement
  • The tax base or tax rules for assets and / or liabilities are different

VIDEO

Loading the player...

BREAKING DOWN 'Deferred Tax Asset'

For example, a computer manufacturing company estimates based on previous lines of production that the probability a computer will be sent back for warranty repairs in the next year is 2% out of the total production. If the company's total revenue in year 1 is $3,000 and the warranty expense is $60 (2% * $3,000) then the company's taxable income is $2,940. However most tax authorities do not allow companies to deduct expenses based on expected warranties, thus the company would actually require to pay taxes on the full $3,000. 

If the tax rate for the company is 30% then:

The difference of $18 ($900 - $ 882) between the taxes payable in the income statement and the taxes payable to the tax authority is considered the deferred tax asset. 

RELATED TERMS
  1. Tax Deduction

    A deduction from gross income that arises due to various types ...
  2. Accrual Accounting

    An accounting method that measures the performance and position ...
  3. Accounts Receivable - AR

    Money owed by customers (individuals or corporations) to another ...
  4. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  5. Asset

    1. A resource with economic value that an individual, corporation ...
  6. Taxable Income

    The amount of income that is used to calculate an individual's ...
Related Articles
  1. Professionals

    Deferred Tax Asset

    A Deferred Tax Asset is an asset on a company’s balance sheet that may be used to reduce taxable income. It is the opposite of a deferred tax liability, which describes something that will increase ...
  2. Taxes

    After-Tax Balance Rules For Retirement Accounts

    Accumulating post-tax assets can work to your advantage. Find out how.
  3. Investing

    Zooming In On Net Operating Income

    NOI is a long-run profitability measure that smart investors can count on.
  4. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  5. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  6. Economics

    Explaining Replacement Cost

    The replacement cost is the cost you’d have to pay to replace an asset with a similar asset at the present time and value.
  7. Economics

    How Does National Income Accounting Work?

    National income accounting is an economic term describing the system used by a country to gather data and determine aggregate economic activity.
  8. Investing Basics

    3 Companies That Hate Debt Financing

    Learn how companies such as Chipotle, Bed Bath & Beyond, and Paychex are able to maintain impressive levels of growth without debt financing.
  9. Fundamental Analysis

    The Economics of FanDuel

    Part of fantasy sports’ success lies in one-day and week-long contests serving as an alternative to season-long games. FanDuel, a leader in this space, has recently surpassed a $1 billion valuation.
  10. Personal Finance

    Invest in Costco? First Understand Its Balance Sheet

    A strong balance sheet sets a company apart and boosts investor confidence. How healthy is Costco based on an analysis of its balance sheets from the last two years?
RELATED FAQS
  1. Who is eligible to hold a deferred tax asset?

    Deferred tax assets can be held by an enterprise that expects to realize a future tax benefit. Examples of this include companies ... Read Full Answer >>
  2. How is a deferred tax asset taxed?

    With deferred tax assets, taxes have been paid or carried forward but not yet recognized as a normal asset by the firm in ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  2. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  3. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  4. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  5. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
  6. Marlboro Friday

    A reference to Friday, April 2, 1993, when Philip Morris, the maker of Marlboro cigarettes, announced that it would be cutting ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!