Introduction
Deferred Tax Assets represent taxes that the company has "prepaid" or can recover in the future due to past losses or temporary accounting differences.
Explanation
When a company has losses, it can use them to reduce future taxes. This is recorded as a "deferred tax asset." Example: Amazon had losses in the 90s-2000s that it used to reduce taxes in the 2010s when it became profitable.
Formula
There is no simple formula, but it appears in the Balance Sheet under "Deferred Tax Assets"
Example
Startup Company: - Lose $100M in 2020 - Tax rate: 20% - Deferred Tax Asset: $20M - In 2021 you earn $100M, pay $0 taxes using 2020 losses
How to read it
High Deferred Tax Assets can indicate: 1) Company had past losses (not always bad if it is now profitable), 2) Temporary differences between financial and tax accounting. Red flag: tax assets that are never realized (company does not generate enough future profits to use them).
Key takeaways
- Deferred Tax Assets = future tax benefits
- They come from past losses or temporary differences
- Amazon used 90s losses to cut taxes in 2010s
- Highs may indicate historical losses
- Red flag: tax assets that are never realized
- Only valuable if the company will be profitable in the future