If you want to know what DTA finance is, then you are in the right place. Items on the balance sheet of a company that may be used for the reduction of taxable income in the future are known as deferred tax assets. This situation can happen when businesses paid their taxes in advance on their balance sheet or overpaid their taxes. These taxes are returned to the business in form of tax relief. When a company overpays tax, it is considered an asset.

Deferred tax assets meaning

Deferred tax assets or DTA are often created due to taxes carried forward or paid but not yet recognized on the company’s income statement. DTA can be created due to the tax authorities recognizing expenses or revenues at different types than accounting standards. The asset helps to reduce the future tax liability of a company. It is therefore important to understand that a DTA is only recognized when the difference between the depreciation of an asset and the loss value of the asset is expected to offset the future profit.

A DTA can conceptually be compared to refundable insurance premiums or rent paid in advance – while the business no longer has the cash, it has comparable value and all this must be reflected in the financial statements.

Knowing how DTAs arise

DTAs are created due to the taxes carried forward or paid but not yet recognized on the income statement. Now that we know the DTA finance definition, we will give you an example of a DTA. Deferred tax assets can be created due to the authorities recognizing expenses or revenue at different times than accounting standards.

This asset is very helpful as it reduces the future tax liability of a company. It is therefore important to know that a DTA is typically recognized when the difference between depreciation or loss-value of the asset is projected to offset the future profits.

A DTA can conceptually be compared to paying rent in advance or refundable insurance premiums – whilst the company no longer has cash, it has comparable value. This must be reflected in the financial statements of a company.

Understanding how a DTA arises

The carryover of losses is the simplest example of a DTA. If a company incurs a loss, it is usually entitled to use the loss to lower the taxable income in the coming years. the loss is an asset in that sense.

A DTA can also arise when there is a difference between the tax rules and accounting rules. Deferred taxes usually exist when business expenses are recognized in the income statement of a company before they are needed to be recognized when the revenue is subject to taxes before it becomes taxable in the income statement or by the tax authorities.

Considerations for DTA

There are some considerations for DTA finance. It is important to consider how the value of DTAs is affected by tax rates. If tax rates go up, it works in the favor of the company because the values of the assets also go up.