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What is a deferred tax asset?

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Last editedNov 20202 min read

Deferred tax assets are items that may be used for tax relief purposes in the future. Usually, it means that your business has overpaid tax or has paid tax in advance, so it can expect to recoup that money later. This sometimes happens because of changes in tax rules that occur in the middle of the tax year. It can also occur when a business incurs a loss over the course of a financial year, as these losses can then be used to offset future taxable profits.

What is the difference between current tax and deferred tax?

Current tax is the income tax that is payable in respect of the taxable profit made in a particular financial period. By contrast, deferred tax recognises “timing differences” and “temporary differences” that may create an economic benefit for the business in the future.

What is the difference between deferred tax assets and deferred tax liability?

The two terms sound similar, but they’re actually complete opposites. While a deferred tax asset often represents an overpayment of tax that can be reclaimed later down the line, a deferred tax liability represents an underpayment of tax that will have to be made up at a later date.

How do you measure deferred tax assets and liabilities?

The typical method of recognising the amount of deferred income tax within a business is often known as the “liability method,” which accounts for temporary differences between tax bases and carrying amounts. Interestingly, deferred tax assets are not fixed in value. If tax rates go up, assets can also increase in value and work in your organisation’s favour. However, deferred tax liabilities can also fluctuate. Similarly, if tax rates go down, your business may get less benefit out of its deferred tax assets.

Since 2018, businesses have been able to carry forward their deferred tax assets for an indefinite period of time, which allows some cushioning to account for fluctuating tax rates.

Deferred Tax Assets (DTA) in accounting

Deferred tax assets are essential for balancing your business’s books. Some deferred tax assets are a direct result of your business’s accounting model, as they can arise where revenue is recognised as income but is not taxable or where the accounting period is misaligned with the tax period. As a result, it is important that company accountants are aware of any outstanding deferred tax assets and liabilities and the way they impact a company’s perceived income.

Are deferred tax assets recoverable?

A deferred tax asset will only be recognised as such if it is likely that it will be recovered. Deferred tax assets can be recovered through a number of different methods, such as a sale. Often, assets are recovered through a combination of the two – although this will likely depend on the asset in question and industry standards.

Is deferred tax a current asset or non-current?

In accounting terms, assets are referred to as current assets if they are likely to provide a financial benefit to the business within one economic year. Examples of these types of assets include cash, inventory, and accounts receivable. This is not typically the case with deferred tax assets, and so they are considered non-current assets. Deferred tax liability can be either current or long-term, depending on their precise nature.

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