A deferred tax asset is an item on the balance sheet that results from overpayment or advance payment of taxes. On a company’s balance sheet that may be used to reduce taxable income in the future are called deferred tax assets.
Why is deferred tax assets used?
The situation can happen when a business overpaid taxes or paid taxes in advance on its balance sheet. These taxes are eventually returned to the business in the form of tax relief. Therefore, overpayment is considered an asset to the company.
The simplest example of a deferred tax asset is the carryover of losses. If a business incurs a loss in a financial year, it usually is entitled to use that loss in order to lower its taxable income in the following years.^In that sense, the loss is an asset.
Another scenario where deferred tax assets arise is when there is a difference between accounting rules and tax rules. For example, deferred taxes exist when expenses are recognized in the income statement before they are required to be recognized by the tax authorities or when revenue is subject to taxes before it is taxable in the income statement. Essentially, whenever the tax base or tax rules for assets and/or liabilities are different, there is an opportunity for the creation of a deferred tax asset.
What is tax deferred annuity?
A tax-deferred annuity is an investment vehicle used by an individual planning his retirement income. It is sold by insurance companies, and it offers fixed or variable rates of return. A tax-deferred annuity grows tax-free until retirement. The funds accrue through monthly premiums and get converted into monthly payments made to the individual at retirement.
What is tax deferred growth?
Tax-deferred growth is investment growth that’s not subject to taxes immediately, but is instead taxed down the line. Perhaps the most common example of tax-deferred growth is that which you’ll get in a retirement plan like a traditional IRA or 401(k). Annuities also offer tax-deferred growth, making them a viable though perhaps less popular option for generating retirement income.
What is tax deferred savings plan?
A tax-deferred savings plan is an investment account that allows a taxpayer to postpone paying taxes on the money invested until it is withdrawn, generally after retirement. The best-known such plans are individual retirement accounts (IRAs) and 401(k)s.
Conclusion
Deferred tax assets are some of the many taxes imposed by the IRS which are beneficial to the tax payers. But these have to be used tactically and professionally. Our tax experts at the National Tax Preparers of America (NTPA) will help you file your tax returns accurately.
