Deferred Tax Asset: Meaning with Examples

A deferred tax asset is another term used in accounting to describe a potential tax benefit that a company can enjoy in the future. It comes into play when a company has paid more taxes than necessary or when it has certain deductions that can be used to reduce its future taxable income. Some examples of deferred tax assets examples are Accrual of Expenses and Tax Loss Carry-forward.

When we say a company has a deferred tax asset, it records it as an asset on its balance sheet. This asset represents the value of the expected tax benefit that the company believes it will receive in the future. Think of it as a way for the company to save on taxes.

Deferred tax assets calculation and examples

The steps below can be used in the deferred tax asset calculation process:

1. Compile a list of your assets and obligations.
2. Figure out the tax basis.
3. Determine the transient difference.
4. Determine the tax obligation rate.
5. Calculate the tax assets
6. List the items that are not part of the financial position.
7. Compile all the information and add it to the accounts.

Or businesses can calculate their deferred tax assets using the IT department's calculator. The company's tax status, assessment year, annual taxable revenue (pre-tax), and expected average yearly tax rate are all necessary information to enter into this calculator.

Here are some examples of Deferred tax assets -

Depreciation Differences:

When a company uses a higher depreciation rate for tax purposes than accounting purposes, it creates a temporary difference, resulting in a DTA.

Provision for Bad Debts:

Timing differences between recognising provisions for bad debts based on expected credit losses (accounting) and claiming deductions for bad debts when they are written off (tax) generate DTAs.

Unabsorbed Business Losses:

Business losses incurred in a financial year can be carried forward to offset future profits, creating DTAs.

Minimum Alternate Tax (MAT) Credit:

Companies paying MAT can carry forward the MAT credit as a DTA to offset future regular tax liabilities.

Tax Incentives and Deductions:

Tax incentives, such as those for companies in Special Economic Zones (SEZs), create DTAs for future offsetting of tax liabilities.

These examples illustrate how DTAs can arise in various scenarios in the Indian context. However, the calculation and treatment of DTAs may vary based on specific circumstances and the applicable tax laws and accounting standards in India.

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Frequently Asked Questions

1. Do Deferred Tax Assets Carry Forward?

Yes, DTAs can be carried forward to future periods. When a company has a DTA, it means it has recognised a tax benefit that can be utilised in the future to offset taxable income and reduce tax liabilities.

In India, if a company is unable to fully utilise its DTAs in the current period due to insufficient taxable income, it can carry forward the balance DTAs to future periods. The ability to carry forward DTAs allows companies to benefit from the tax benefits they may have accrued but have not yet utilized fully.

2. Why Do Deferred Tax Assets Occur?

Deferred tax assets occur due to temporary differences between accounting and tax treatments. They arise from factors like timing differences in revenue recognition, tax loss carryforwards, accelerated depreciation, provisions, and tax credits or incentives. DTAs represent potential tax benefits that can be utilised in the future to reduce tax liabilities.

3. What is an example of a deferred asset?

Deferred assets include things that a business pays for in advance but hasn't yet reaped the rewards of. Let's assume that a business prepays for a year's worth of insurance protection. Due to the fact that the insurance coverage will be used throughout the year, the payment is recorded as a prepaid cost, which is a sort of deferred asset. The prepaid charge is eventually classified as an expense in the financial accounts of the firm as time goes on and the insurance coverage is used.

4. How do you account for deferred tax assets?

To account for deferred tax assets, you must-

• Recognise them when probable that the company will have sufficient taxable income in the future.
• Measure them at the enacted tax rates.
• Establish a valuation allowance if needed.
• Present them as non-current assets.
• Disclose relevant information.

You must consult accounting standards and professionals for specific guidance.

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