Sorting out your finances sometimes can seem like learning a new language. Everything accountants do have a valid, logical and legal reason — as well as a direct connection to real-world issues. A deferred tax asset is no different. A deferred tax asset is a line item on your balance sheet that you can use to reduce your taxable income for a given year. It’s the opposite of a deferred tax liability.
Deferred tax assets and deferred tax liabilities not only play a role in your taxes; they also impact your cash flow, now and in the future. Miller & Company LLP, NY Certified Public Accountants, a best rated CPA firm in NYC.
Although there are many reasons to have a deferred tax asset on your balance sheet (under Current Assets) and in your tax return, one of the more common is to cover future expenses on money you’ve earned in the current year. In this example, that future expense is a current asset since you have the money now to pay for the planned expense you haven’t yet paid.
The concept of deferred tax assets and liabilities came about because the way you calculate your taxes differs from the way you calculate your financial statements. The two equations use different instructions or guidelines. As a result, a line item that you see as an expense on a financial statement (such as your profit and loss statement) may actually end up an asset on your taxes.
The two accounting systems — finances and taxes — differ in some fundamental ways. Some differences don’t ever change. For example:
Other types of assets vs liabilities are more fluid in nature, caused by the somewhat arbitrary period called a tax year. Given enough time, these assets and liabilities would cancel each other out, but year by year, you may experience them separately.
Deferred tax assets refer to money you’ve paid in taxes toward a future tax deduction. It’s an asset because you can use it in the future as money, at least as far as your taxes are concerned. A few solid examples include:
And now for several examples of deferred tax liabilities:
There’s an ebb and flow to business financials. It loosely corresponds to your cash flow. A deferred tax asset has a positive connotation because it’s money already spent that can benefit you in the future. At the same time, that deferred tax asset can affect your current cash on hand because you have to pay taxes on it since it’s money you have, but it’s also money you’re going to pay out to cover expenses.
A deferred tax liability, on the other hand, sounds like something to avoid. While it does refer to future money that you or your company will have to pay — therefore, it technically is a liability — a deferred tax liability actually increases your cash on hand. In other words, you’re using money now you’ll have to pay back in the future.
When you put the two together, you can recognize that some ebbs and some flows over time can be beneficial to your business. It all evens out in the end, but in the meantime, you either get the benefit of future deductions (from a deferred tax asset) or the benefit of more cash on hand (from a deferred tax liability). To find out how tax deferred assets and liabilities can help or hurt your business, talk to a best rated New York CPA at Miller & Company, one of the best accounting firms in Manhattan and the New York City metropolitan area.
Just because your company has deferred tax assets on its books doesn’t mean you automatically get to use them in full. There are tax rules and conditions that govern their use. You or your company has to satisfy these conditions before you can benefit from them.
For example, some businesses and individuals, even successful ones, sometimes experience a loss. When this happens, you may not be able to deduct the entire loss amount. You may be able to carry the balance forward. In the language of taxes, you carry a net operating loss onto your subsequent tax forms until the balance runs out or expires (it doesn’t last forever). In this case, you have to earn enough — your net income has to be large enough — to cover the loss.
Since future income is unknown, at least to governing bodies, you can’t access your deferred tax assets unless and until you earn enough. It’s not guaranteed. The amount you can use in a given year is called your valuation allowance. To learn about the qualifications for using a deferred tax asset, talk to a Miller & Company CPA.
Do you have questions about services we offer including Deferred Tax Asset in NYC and Long Island? Would you like to receive a personal Deferred Tax Asset consultation customized to your specific needs? To schedule an appointment with a nationally recognized, best rated New York CPA, Paul Miller of Miller & Company LLP firm, please contact our Long Island or NYC tax accountants for a FREE CPA consultation.
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