Accounting Calculate Deferred Tax Asset

A deferred tax asset is an accounting concept that represents the temporary difference between the taxable income of a company and its book income. This difference arises when a company has temporary differences between the tax base and the carrying amounts of assets and liabilities.

What is a Deferred Tax Asset?

A deferred tax asset occurs when a company's taxable income is less than its accounting income due to temporary differences. These differences can arise from various factors, including:

Prepayment of expenses
Acceleration of depreciation
Accrual of income
Changes in tax laws

Deferred tax assets are recorded in the balance sheet and are expected to be realized when the temporary differences are eliminated, typically in future tax periods.

How to Calculate Deferred Tax Asset

Calculating a deferred tax asset involves determining the difference between the taxable income and the accounting income, then applying the applicable tax rate. The calculation can be broken down into several steps:

Calculate the temporary difference between taxable income and accounting income
Determine the applicable tax rate
Multiply the temporary difference by the tax rate to find the deferred tax asset

The deferred tax asset is then recorded in the company's financial statements as a non-current asset.

Formula

Deferred Tax Asset Formula

The formula to calculate a deferred tax asset is:

Deferred Tax Asset = (Taxable Income - Accounting Income) × Tax Rate

Where:

Taxable Income is the income recognized for tax purposes
Accounting Income is the income recognized for financial reporting purposes
Tax Rate is the applicable tax rate for the company

This formula accounts for the temporary difference between taxable income and accounting income, which will be realized in future tax periods.

Worked Example

Let's consider a company with the following financial information:

Taxable Income: $1,200,000
Accounting Income: $1,500,000
Tax Rate: 30%

Using the formula:

Deferred Tax Asset = ($1,200,000 - $1,500,000) × 30% = -$90,000

In this case, the company has a deferred tax liability rather than a deferred tax asset because the taxable income is less than the accounting income. The negative value indicates that the company will have to pay additional taxes in the future.

FAQ

What is the difference between a deferred tax asset and a deferred tax liability?

A deferred tax asset occurs when a company's taxable income is less than its accounting income, while a deferred tax liability occurs when taxable income is greater than accounting income. The sign of the deferred tax amount determines whether it's an asset or a liability.

How are deferred tax assets recorded in financial statements?

Deferred tax assets are recorded as non-current assets in the balance sheet. They are expected to be realized in future tax periods when the temporary differences are eliminated.

What factors can create temporary differences between taxable income and accounting income?

Temporary differences can arise from prepayment of expenses, acceleration of depreciation, accrual of income, and changes in tax laws. These differences are expected to be resolved in future periods.