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Main / Glossary / DTA (Deferred Tax Asset)

DTA (Deferred Tax Asset)

A deferred tax asset (DTA), within the realm of finance, billing, accounting, corporate finance, business finance, bookkeeping, and invoicing, is a concept that refers to an asset recorded on a company’s balance sheet that represents potential tax benefits in the future. It arises when a company has overpaid its taxes and is entitled to receive a refund or reduce future tax payments. Essentially, a DTA reflects taxes paid in advance that can be utilized to offset tax liabilities in the future.

DTAs come into play due to differences between taxable income and accounting income. Generally, these differences occur because tax laws and accounting rules have different criteria for recognizing certain transactions and expenses. Temporary differences between taxable income and accounting income can lead to a DTA, as these differences reverse and result in future tax benefits.

The recognition of a DTA occurs when the future reduction in taxes payable is probable, based on available evidence. This likelihood is evaluated by considering projected taxable income, the timing of reversals of temporary differences, and tax planning strategies.

DTAs are commonly seen during periods of losses, as companies may experience negative taxable income but still have existing temporary differences that suggest future taxable income will be higher. Under accounting principles, companies must assess the realizability of DTAs by applying a more likely than not threshold. If it is more likely than not that some or all of the DTA will not be realized, a valuation allowance must be established.

A valuation allowance is a reduction in the carrying amount of the DTA to align it with the amount expected to be realized. It is necessary when sufficient positive evidence, such as a history of taxable profits or reliable future taxable income projections, is lacking. While the establishment of a valuation allowance reduces the net carrying value of DTAs, it is adjusted over time to reflect changes in the realizability assessment.

DTAs are measured based on enacted tax rates and laws expected to apply in the year when the temporary differences reverse. Changes in tax rates or laws may impact the carrying value of the DTA. Thus, companies must adjust their DTAs to reflect the current and future tax rate information.

It is worth noting that DTAs can be categorized as either current or noncurrent, depending on the timing of their expected utilization. Current DTAs are anticipated to be realized within one year, while noncurrent DTAs are expected to be realized beyond a year.

To conclude, a DTA represents future tax benefits recorded as an asset on a company’s balance sheet. It arises from temporary differences between taxable income and accounting income. Such differences may lead to refunds or reductions in future tax payments. The recognition of DTAs depends on the probability of realizing tax benefits in the future, and the valuation of these assets may require the establishment of a valuation allowance. Measurement of DTAs is based on enacted tax rates and laws, and changes in these rates may impact their carrying value.