Deferred Tax Asset
A balance sheet asset representing future tax savings from temporary timing differences.
What is Deferred Tax Asset?
A deferred tax asset (DTA) arises when a company pays more tax to the government than it recognizes as tax expense under GAAP, creating a future tax benefit. Common sources include net operating loss carryforwards, warranty liabilities expensed for GAAP purposes before they are deductible for tax, and accelerated depreciation claimed on tax returns that reverses in later years. A DTA signals that the company will owe less tax in future periods. Under GAAP (ASC 740), a valuation allowance must reduce the DTA if it is more likely than not that the benefit will not be realized — for example, if insufficient future taxable income is expected.
Example
A company records a $5 million warranty expense under GAAP in Year 1. The IRS does not allow this deduction until claims are actually paid in Year 2. In Year 1, the company pays taxes on $5 million more income than it reported under GAAP, creating a $1.25 million deferred tax asset (assuming a 25% tax rate) representing tax savings it will realize when the warranty claims are paid.
Source: FASB Accounting Standards Codification — ASC 740 Income Taxes