What is a Deferred Tax Asset?

A deferred tax asset is income taxes that are recoverable in a future period. It is caused by the carryforward of either unused tax losses or unused tax credits. It is classified as an asset, and appears on the balance sheet.

Examples of Deferred Tax Assets

Here are several examples of deferred tax assets:

Net operating loss carryforwards. If a company incurs losses in one year, it may carry these losses forward to offset taxable income in future years. The value of the losses becomes a deferred tax asset, as it reduces future tax liabilities.
Depreciation differences. Tax and accounting depreciation methods may differ, resulting in a higher accounting depreciation expense in the initial years than what’s allowed for tax purposes. This results in a deferred tax asset that offsets future taxable income as the depreciation reverses.
Pension benefits. Expenses for employee pension and retirement benefits may be recognized for financial reporting purposes but only be deductible for tax purposes when paid. This timing difference results in a deferred tax asset.
Unrealized losses. If a company holds investments that have decreased in value, it may recognize an unrealized loss for financial reporting purposes but not for tax purposes until the investment is sold. This temporary difference can create a deferred tax asset.

Reasons for a Deferred Tax Asset

There are a number of reasons why a deferred tax asset occurs, such as overpaying taxes in the current period or differences between the accounting standards and tax laws. For example, a business might have a loss carryover, which it can use to reduce its taxable income in a subsequent period.