Future tax savings already earned
Deferred tax assets are future tax savings your business has already earned: losses, credits, and expenses booked now that will reduce a tax bill later.
The short answer
Timing gaps between books and tax
They come from timing differences between your financial statements and your tax return, and they only pay off if there is future income to absorb them.
Three moments they matter most
They matter most in three moments: closing your books, raising or borrowing money, and selling the company.
Balance sheet questions rarely stay theoretical for long. Ask them before the audit or the deal does.
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Call (212) 641-0673 or send the contact form. Our team gets back to you within 24 hours, and we are available evenings and weekends.
Confidential, and handled by a CPA or EA, not a call center.
The definition
A future tax deduction you have already paid for
The books say the expense happened; the tax return says not yet.
A deferred tax asset is a future tax deduction your business has already paid for. The books say the expense happened; the tax return says not yet. That gap appears on the balance sheet as an asset because, when it reverses, it shrinks a real tax bill.
The most familiar example is a net operating loss. A loss year creates a carryforward that, under current law, carries forward indefinitely and can offset up to 80% of taxable income in a future year. That carryforward is money. It just has not yet reached a year with income to absorb it.
01Where they come from
Where deferred tax assets come from
- Net operating loss carryforwards from years the business ran at a loss.
- Tax credit carryforwards, such as research credits earned but not yet usable.
- Expenses booked before the tax return allows them: bad debt reserves, warranty accruals, deferred compensation.
- Stock compensation expensed on the books ahead of the tax deduction at vesting or exercise.
- Costs capitalized for tax purposes that the books already ran through the income statement.
02How it becomes cash
How a deferred tax asset becomes cash
A deferred tax asset becomes cash when the timing difference reverses. The reserve becomes a write-off, the loss carryforward reaches a profitable year, and the credit offsets a real liability. In that year, taxable income drops, the check to the IRS shrinks, and the asset leaves the balance sheet.
The reversal has rules. The 80% income limit on post-2017 losses means a large carryforward is used in slices, and a company can owe some tax even while sitting on losses. For example, a company carrying a $1 million net operating loss into a year with $500,000 of taxable income can offset only $400,000 of it, so $100,000 is still taxed despite the loss. We model which year absorbs each slice as part of your business tax work, because timing a deduction into a high-rate year saves real money.
03Valuation allowance
When a valuation allowance reduces the asset
More likely than not — the burden of proof is on you.
A valuation allowance reduces a deferred tax asset when it is more likely than not that part of it will never be used. Accounting standards (ASC 740) put the burden of proof on you: a history of losses is the classic strike against realizability, and it is the first thing a reviewer or auditor will probe.
04When they matter
When deferred tax assets matter most
Deferred tax assets matter most at three moments.
| Moment | Why it matters | What is at stake |
|---|---|---|
| Year-end close | The tax provision must be right before statements go out | Misstatement and restatement risk |
| Financing | A bank or investor discounts assets they do not believe in | A smaller borrowing base or lower valuation |
| Sale | A buyer prices carryforwards down, and an ownership change under Section 382 caps how fast acquired losses are used | Value conceded in the deal |
Sellers routinely leave value on the table here. A documented, supportable deferred tax position is negotiable currency in a deal; a vague one is a discount waiting to be applied.
05How we help
Tax provision help from a NYC CPA firm
This is balance-sheet work and tax work at once, so it draws on both sides of our practice.
12+ years
serving NYC
3,000+
five-star reviews
5 star
Google and Yelp
Open
evenings and weekends
From the record
On the process, and on the philosophy
“We engaged George Dimov for an inception audit on our tech startup in preparation for equity crowdfunding... They committed to a 10 day process and completed the project in less than half the time. We’re extremely satisfied and recommend them highly!”
David Levine
Google review
“My clients are always looking to legally save taxes, and the kind of clients I have want to follow the rules. They want to follow the law and they are looking for an advisor that’s going to help them put together a strategy that long-term is going to ensure that they do not overpay.”
George Dimov, CPA
06A note on schedules
Rebuild the schedule once
The pattern we correct most often: a company tracking its loss carryforward from memory, with no schedule of what arose when, under which rules, and in which state. Federal and New York carryforwards do not always match, and a number nobody can support is a number nobody will pay for. We rebuild the schedule once, then it rolls forward every year with the business return.
Bring your last two returns and your year-end balance sheet. The carryforward schedule usually explains itself from there.
[ Book a consultation ]
Call (212) 641-0673 or send the contact form. Our team gets back to you within 24 hours, and we are available evenings and weekends.
Confidential, and handled by a CPA or EA, not a call center.
Balance-sheet and tax work together
Rebuild your carryforward schedule with a CPA
Send us your last two returns and year-end balance sheet. We will scope the schedule and the valuation allowance question, and hand you back a supportable position before your next close.
Reviewed by George Dimov, CPA, New York, NY. Licensed in all 50 states, 15+ years advising on corporate tax provision and planning. President of George Dimov, CPA, a New York City firm serving clients across the five boroughs and nationwide.