What Is a Deferred Tax Asset

A deferred tax asset is an item on a company’s balance sheet that reflects taxes it has already paid—or is expected to recover in the future—often due to a mismatch between accounting rules and tax regulations. In simpler terms, it represents an overpayment or advance payment of taxes that a company can apply to reduce coming fiscal liabilities. 

This article examines the causes, implications, and practical uses of deferred tax assets, especially in the context of global business accounting. Designed for CFOs, tax professionals, international entrepreneurs, and corporate accountants, it provides a serious and technical overview of a concept that plays an important role in cross-border tax planning and financial reporting.

Definition and Concept of Deferred Tax Assets

Very often, accounting and taxation do not go hand in hand—this is precisely where deferred tax assets arise. If you’ve ever wondered what is a deferred tax asset, think of it as a tax benefit generated by timing mismatches between financial reporting and tax rules. For example, some expenses are often recorded immediately but remain deductible only in the future according to tax rules.

It is also important to clarify one concept right away: DTA is credit that allows you to reduce expenses; deferred tax liability is debt, indicating that the company will have to pay more taxes in the future.

Common Causes of Deferred Tax Assets

But what is deferred tax asset, and what are the main reasons why they arise?

• Net operating losses (NOLs) carried forward: When a company closes a fiscal year at a loss, it can “carry it forward” to offset coming profits and derive a tax benefit.
• Unused tax deductions or credits: The company can use the unused portion of tax deductions or credits in subsequent years.
• Temporary differences in expense recognition: These differences arise due to the mismatch between reporting and tax obligations. Companies record provisions for bad debts in their accounts before claiming the deduction.
• Differences in depreciation methods: Here too, the mismatch is due to different requirements between accounting—where depreciation is more linear over time—and taxation.

Recognition Criteria Under Accounting Standards

In order to benefit from deferred tax assets, the vast majority of international accounting standards apply the “more likely than not” criterion.

• IFRS (International Financial Reporting Standards) explicitly states that there must be “reasonable certainty” of generating taxable profits to offset deferred taxes.
• GAAP (Generally Accepted Accounting Principles) introduces the “more likely than not” criterion, defining it as at least a 50% probability of recovering the credit.

If companies cannot meet these conditions, they cannot recognize DTAs or must reduce them by applying a valuation allowance. In addition, companies must perform periodic impairment tests to check for any economic changes.

Deferred Tax Assets vs Deferred Tax Liabilities

Deferred tax assets and deferred tax liabilities are two sides of the same coin.

• A DTA is a “tax credit” that arises when a company pays more tax than it owes in the short term.
• A DTL is a tax liability that arises when companies pay less tax in the present.

Both can appear on a company’s financial statement at the same time. For example, a business may have a DTA for past losses and, at the same time, a deferred tax liability related to the accelerated depreciation of a machine.

Impact on Financial Statements and Tax Planning

A deferred tax asset has an impact on both a company’s income statement and balance sheet. In the first case, it reduces the current income tax burden, thereby improving the net result. In the balance sheet, it appears as a tax credit and is recorded under assets. It makes cash flow forecasting easier, since the company knows it will owe less tax down the line.

However, investors may be wary if there are excessive DTAs in the financial statements: they could be a sign of significant past losses or an inability to generate profits.

Deferred Tax Assets in Consolidated Group Structures

In setups like holding companies, where different entities fall under one umbrella, it becomes possible to handle tax losses and timing gaps in a coordinated way—helping the group keep its tax strategy aligned.

For example, a holding company can use a DTA to offset the profits of another entity within the group.

This phenomenon is particularly relevant for those structuring a holding company with a view to tax optimization: knowing where and how to recognize DTAs can influence the choice of jurisdiction, consolidation method, or even unlock holding company tax benefits.

Global Considerations and Jurisdictional Differences

Different jurisdictions treat DTAs in different ways. In the US, the “more likely than not” threshold tends to set the bar, while in the EU, companies generally follow IFRS guidelines.

That said, keeping up with changes in tax laws and accounting standards is essential—falling behind can affect tax filings and throw off future projections, especially in scenarios involving tax arbitrage. 

Changes in tax rates or regulations can reshape the way deferred tax assets are measured—and that, in turn, may have a direct impact on future cash flows. In situations like these, having a corporate tax consultant or trusted advisors by your side can make a real difference.

Risks, Limitations, and Regulatory Considerations

The main risk associated with DTAs is the possibility of overestimating their actual value in the financial statements.

In this case, international accounting standards require a valuation allowance, i.e., an adjustment of the carrying amount to bring it into line with reality.

Controls can also be very strict, especially in jurisdictions that allow very aggressive tax planning. This forces companies to continuously assess the real value of DTAs and involve their fiscal management teams to avoid disputes or penalties.

Practical Examples and Case Scenarios

Deferred tax assets are used in many business situations, often linked to timing differences between statutory and tax accounting.

For example, when a company sets aside €100,000 for doubtful receivables that are not yet tax deductible, it can recognize a deferred tax asset of €30,000 (at a rate of 30%), which will reduce future taxes. 

In other cases, such as startups with significant initial losses, companies may delay recognizing the theoretical benefit of NOL carryforwards in their financial statements—especially if their products have not yet reached the market or generated revenue. 

When the business starts to generate taxable income, however, those past losses become a concrete advantage: an NOL of €200,000 can offset prospective profits to reduce the tax base and generate immediate tax savings, improving liquidity and planning.

FAQs

What is a deferred tax asset?

A DTA is essentially a credit a company can use to lower its coming tax bills. It shows up on the balance sheet as something valuable—usually linked to losses or taxes the business has already paid but hasn’t yet used.

How is a deferred tax asset created?

It happens when a company ends up paying more tax upfront than it technically owes—often because of timing differences. For example, it might record an expense in its accounts that the tax authority doesn’t recognize until later. 

What are common examples of deferred tax assets?

You’ll often see DTAs arise from items such as net operating losses, provisions for doubtful debts, or differences in depreciation calculations.

Can a deferred tax asset be lost?

Yes, and it’s a real risk. If a company doesn’t generate enough taxable income in the future, it may have to reduce or even eliminate the DTA’s value—it simply won’t be able to use it.

How does a deferred tax asset affect financial performance?

DTAs can improve a company’s financial outcomes by lowering tax expenses in certain periods. That means higher net income and better cash flow projections—especially useful for long-term planning.

What’s the difference between a deferred tax asset and liability?

Think of them as opposites. A DTA helps reduce future taxes; a deferred tax liability means the company will owe more tax later. One is a benefit, the other a cost.

Do all jurisdictions treat deferred tax assets the same?

Not at all. Different countries and their tax laws determine how companies recognize, value, and apply DTAs—and how long they can keep using them.

References

Investopedia. (2020, September 16). Deferred Tax Asset: Calculation, Uses, and Examples. https://www.investopedia.com/terms/d/deferredtaxasset.asp viewpoint.pwc.com+4investopedia.com+4ifrs.org+4

Bloomberg Tax. (2023, novembre). ASC 740 Valuation Allowances for Deferred Tax Assets. https://pro.bloombergtax.com/insights/provision/asc-740-valuation-allowances-deferred-tax-assetsdart.deloitte.com+4pro.bloombergtax.com+4pro.bloombergtax.com+4

KPMG. (2023). Income Taxes: IFRS® Accounting Standards versus US GAAP.
https://kpmg.com/us/en/articles/2023/income-taxes-ifrs-accounting-standards-us-gaap.html