Deferred Tax Assets

Overview

• A deferred tax asset (DTA) indicates prepayment of taxes for certain activities.
• Occurs when taxable income is higher than pre-tax gap income in the period the DTA originates.
• Results in higher current period taxes but lower future taxes.

Accounting for DTA

• When a DTA originates, debit the DTA account by the temporary difference multiplied by the tax rate.
• Recorded as part of the journal entry for tax expense.
• As the temporary difference reverses, credit the DTA account.

Examples of Transactions

1. Accrued Expenses

• Definition: Expenses on the income statement not yet paid or deducted on the tax return.
• Example: Warranty expense.
  • Estimated and accrued under GAAP in the related product's sale period.
  • Not deducted for tax purposes until paid.
• Impact:
  • Initial lower tax deductions, higher tax payable.
  • Increase or debit to the DTA.
  • Decrease or credit to DTA when warranty claims are paid.

2. Deferred Revenues

• Definition: Cash collections where revenues are not yet earned.
• Tax Treatment:
  • Included in taxable income when received.
  • Revenues must be earned before recognized under U.S. GAAP.
• Impact:
  • Higher taxable income than pre-tax income when cash is received.
  • Higher tax payable, increase or debit to DTA.
  • Decrease or credit to DTA when revenue is recognized.

Other Causes of DTA

• Unrealized losses from certain investments.
• Loss carryovers.
• Income tax credits.

Key Takeaways

• DTAs arise from temporary differences.
• Created when expenses are incurred but not yet paid, or cash is collected in advance for unearned revenue.
• These differences are temporary, and DTAs are reduced in future periods.

Thank you for attending this lesson on deferred tax assets. See you next time.