A Deferred Tax Asset

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What is a ‘deferred tax assets’

Deferred tax asset is an asset on the balance sheet of the company, which can be used to reduce your taxable income. It can refer to a situation when the business has overpaid taxes and taxes paid upfront on its balance sheet. These taxes are eventually returned to the business in the form of tax breaks, and for the payment, and an asset to the company.

Breaking down the ‘deferred tax assets’

Deferred tax assets are often created at the expense of taxes paid or transferred, but not yet recognized in the statement of profit and loss. For example, deferred tax assets may be created in connection with the tax authorities the recognition of revenue or expenses at different times than the standard. This asset helps in reducing future tax liabilities of the company. It is important to note that deferred tax assets are recognized only when the difference between the loss of value or impairment of assets to offset future profits.

The deferred tax asset can theoretically be compared to the rent in advance or return insurance premiums; while businesses don’t have the money on hand, it has comparable values, and this should be reflected in the financial statements.

A deferred tax asset is the opposite of deferred tax liabilities, which may increase the amount of income tax due from the company.

As There Are Deferred Tax Assets

The simplest example of a deferred tax asset is the transfer of losses. If the business incurs losses in the financial year is, as a rule, has the right to use this loss to reduce its taxable income in subsequent years. In this sense, the loss is an asset.

Another scenario, when there are deferred tax assets, where there is a difference between accounting rules and tax rules. For example, there are deferred taxes when the expenditures are recognized in the statement of profit and loss, before they shall be recognized by the tax authorities or when the income is taxed before it is subject to taxation in the statement of profit and loss. Essentially, whenever the tax base and tax rules for assets and/or liabilities are different, it is possible to create a deferred tax asset.

A practical example of the calculation of Deferred Tax asset

Estimates of the computer production company, based on previous experience that the probability that a computer may be sent for warranty repair in the next year is 2 percent of the total production. If the total amount of sales per year is $3000, and warranty expense in its books is $60(2% x $3,000), the taxable income of the company is 2 940$. However, most tax authorities do not allow companies to deduct expenses based on the expected assurances that the company is required to pay taxes on the full $3,000.

If the tax rate for companies is 30%, the difference in the amount of $18 (60$x 30%) between the taxes paid in the statement of profit and loss and actually paid taxes to the tax authorities, is a deferred tax asset.

Important considerations for Deferred tax assets

There are several key characteristics of the deferred tax assets to consider. First, they come from the date of expiry if they are not used. Most of the time, they expire after 20 years. The second thing to consider how tax rates effect on deferred tax assets. If the tax rate increases, it works for the benefit of the company, because the value of assets also go up, thus providing a larger cushion for more income. But if the tax rate is reduced, the tax value of assets also decreases. This means that the company will not be able to use all the benefits before expiration of the.

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