What defines a deferred tax asset (DTA)?

What defines a deferred tax asset (DTA)?

• A. Anticipated future taxable income will exceed future financial income due to permanent differences.
• B. Anticipated future taxable income will be less than future financial income due to temporary differences.
• C. A DTA is recognized when future income tax rates are anticipated to increase.
• D. DTAs are recorded only when tax credits are not available for carry-forward.

Answer: (B)

A deferred tax asset (DTA) arises when a company expects that its future taxable income will be less than its future financial income as a result of temporary differences between the accounting income reported on financial statements and the income recognized for tax purposes. This usually happens when certain expenses are recognized in the financial records before they are deductible for tax purposes. For example, if a company has incurred expenses that it can deduct on its financial statements in the current period but cannot deduct for tax purposes until a future period, this creates a DTA. This asset represents future tax relief: when these differences reverse, the company will benefit from reducing its taxable income in the future. Hence, the correct answer reflects the fundamental principle behind how deferred tax assets work in relation to temporary differences impacting taxable income.

A deferred tax asset (DTA) arises when a company expects that its future taxable income will be less than its future financial income as a result of temporary differences between the accounting income reported on financial statements and the income recognized for tax purposes. This usually happens when certain expenses are recognized in the financial records before they are deductible for tax purposes. For example, if a company has incurred expenses that it can deduct on its financial statements in the current period but cannot deduct for tax purposes until a future period, this creates a DTA.

This asset represents future tax relief: when these differences reverse, the company will benefit from reducing its taxable income in the future. Hence, the correct answer reflects the fundamental principle behind how deferred tax assets work in relation to temporary differences impacting taxable income.