How Deferred Tax Asset is Calculated?

What is Deferred Tax Asset?

A Deferred Tax Asset is defined as a form of tax credit or benefit that a company has earned but is yet to receive. This item is found in the company balance sheet that reduces its future taxable income. This type of asset is found when a company overpays its taxes. The extra amount will be eventually returned to the company in the form of tax relaxation. Thus, overpayment of taxes can turn out to be an asset to the company. Opposite to deferred tax asset is the deferred tax liability which represents an increased amount in the tax payment of the company....

How Deferred Tax Asset Work?

1. A deferred tax asset is usually formed when payment of taxes is made in advance or carried forward but it is not being recognized in the financial statements of the company....

How is a Deferred Tax Asset Created?

A deferred tax asset can be created by recognizing a tax benefit in the future on a company’s financials. The following list represents how this form of asset be created,...

Examples of Deferred Tax Asset

The carryover of losses is a deferred tax asset. In cases where a business experiences a loss during a particular fiscal year, can use that loss to reduce its taxable revenue in the subsequent years. In this case, a loss is an asset....

How Deferred Tax Asset is Calculated?

Suppose, there is a mobile manufacturing company, who determines the percentage of mobiles which would be sent back to the factory due to repair and maintenance issues (within warranty period) in the coming year. The estimated rate of 5% of the total production....

Benefits of Deferred Tax Assets

The benefits of Deferred Tax assets can be listed as below,...

Difference Between Deferred Tax Liability and Deferred Tax Asset

Basis Deferred Tax Liability (DTL) Deferred Tax Asset (DTA) Definition Represents taxes that a company will likely have to pay in the future due to differences between accounting and tax rules. Represents potential tax benefits that a company has earned but is yet to use it. Type of Balances in Balance Sheet Depicts a negative balance on the balance sheet of the company Positive balance on the company’s balance sheet. Reasons Arises from taxable items or income mentioned in the financial statements but not yet taxable according to the tax rules. Arises from tax-deductible items or losses that can be used to reduce taxable income in the future. Impact of Timing Difference Reflects a timing difference that results in higher future tax payments. Reflects a timing difference that results in potential tax savings in the future. Effect on Future Taxes The future taxable income increases leading to higher taxes. Reduces future taxable income, leading to lower taxes Risk-taking Capacity Depends an obligation that may make companies more cautious about certain financial decisions. So, might or might not take risk. May encourage companies to take risks and make long-term investments. Example Revenue or gains recognized in financial statements but not yet taxed. Losses carried forward, tax credits, or deductible expenses not used immediately....

Frequently Asked Questions (FAQs)

1. Why Do Deferred Tax Assets Occur?...