Deferred Tax Asset

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A deferred tax asset is an amount of income tax a company expects to recover in future, because it has paid tax earlier than its accounts recognise the related expense, or has unused tax losses or credits to carry forward.

Accounting profit and taxable profit are calculated under different rules, so they often differ. When a company pays tax on income or is denied a deduction now, but will get the benefit later, it records a deferred tax asset.

For example, a company sets aside a warranty provision of 300 in its accounts this year, but tax rules only allow the deduction when repairs are actually paid. At a tax rate of 25%, it will save 75 in tax in future, so it records a deferred tax asset of 75.

Unused tax losses are a common source of deferred tax assets, because they can reduce tax on future profits.

A deferred tax asset is only worth something if the company expects enough future taxable profit to use it. Under both IFRS and US GAAP, companies must assess this. Under US GAAP, a valuation allowance reduces the asset if it is more likely than not that some of it will not be used. A large write-down of deferred tax assets can signal that management expects weaker profits.

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