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

INVESTOPEDIA EXPLAINS '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. 

VIDEO

Loading the player...
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. Taxable Income

    The amount of income that is used to calculate an individual's ...
  6. Asset

    1. A resource with economic value that an individual, corporation ...
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. How often should a small business owner go through a bank reconciliation process?

    Small business owners should go through the bank reconciliation process at least monthly, and many business consultants recommend ... Read Full Answer >>
  4. What is the difference between recurring and non-recurring general and administrative ...

    The difference between recurring and nonrecurring general and administrative expenses can best be understood as the difference ... Read Full Answer >>
  5. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>
  6. What can working capital turnover ratios tell a trader?

    A company's working capital turnover ratio is traditionally positively correlated with business performance. A high, or better ... Read Full Answer >>
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. Taxes

    What's a Tax Shield?

    A tax shield is a deduction, credit or other means used to reduce the amount of taxes an individual or business owes to the government.
  6. Fundamental Analysis

    Understanding Consolidated Financial Statements

    Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries.
  7. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.
  8. Professionals

    What Does an Auditor Do?

    An auditor ensures that organizations maintain accurate and honest financial records.
  9. Fundamental Analysis

    Calculating the Net Debt to EBITDA Ratio

    Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
  10. Economics

    How Does an Operating Lease Work?

    Operating lease is a term used mostly in accounting to denote a lease that gives the lessee rights to use and operate an asset without ownership.

You May Also Like

Hot Definitions
  1. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  2. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  3. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  4. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  5. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  6. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
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!