A Deferred Tax Asset is an accounting term on a firm’s balance sheet that is used to illustrate when a firm has overpaid on taxes and is due some form of tax relief.

With deferred tax assets, the firm will have either paid taxes early, or have paid too much tax, and is therefore entitled to some money back from the tax authorities. Deferred tax assets can be used when the company carries over a net loss, but only when there is a greater than 50% chance that the company's accounting income will be positive in the next reporting period. For example, if a company carries forward a deferred tax asset of $100,000 and in the next reporting period has a taxable income of $500,000, it can use this deferred tax asset and reduce the taxable income to only $400,000. However, the company would only be able to report this deferred tax asset of $100,000 if the chance of it making more than $100,000 in income in the next quarter was greater than 50%.

Some examples of when a deferred tax asset may arise are:

  • When a company incurs a tax loss, it can then carry forward the tax loss to reduce taxable income in future years
  • When a company incurs an accounting expense such as debt write-offs or losses on mark-to-market, but does not immediately incur the tax relief

Deferred tax assets are found on the Balance Sheet under Current Assets and is dealt with by all major accounting standards including US GAAP, IFRS and UK GAAP.

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