Deferred Tax Asset
Candlefocus EditorA deferred tax asset can arise due to the differences between accounting and taxation rules, allowing companies to claim more in future deductions to decrease their tax burden. For example, companies may be able to deduct more in expenses when calculating its taxable income than when reporting its finances for the year. This difference can give rise to a deferred tax asset in the current period, as the unpaid taxes can be set aside to be claimed in a later year.
A deferred tax asset may also be created through the carryover of tax losses. Companies with losses in one financial period may be able to use those losses to reduce their tax liability in a future period. These losses can be carried forward on the company's balance sheet as a deferred tax asset, reducing its taxes payable in the future.
Beginning in 2018, most companies are able to carry over a deferred tax asset indefinitely. This represents a change in corporate taxation law, as prior to 2018, companies were only able to carry over DTAs for a specified period of time. This has increased the incentive for businesses to carry over tax losses and create DTAs, resulting in a longer period of time in which they can benefit from a reduced tax liability.
While deferred tax assets can represent a substantial reduction in taxes payable in the future, they must still be carefully managed and monitored. Companies must ensure that the deferred tax asset accurately reflects the amount of taxes that will be owed in the future, ensuring that the values of DTAs do not get out of sync with current tax laws. Inaccurate and outdated tax asset values can result in increased tax liabilities that could negatively affect a company's bottom line.