Deferred Tax Liabilities

Motley Fool  Mar 16  Comment 
The RV seller dropped on no company-specific news. Here's what investors need to know.
Motley Fool  Mar 14  Comment 
The RV dealer popped on a pair of encouraging announcements. Here's what investors need to know.
The Hindu Business Line  Feb 7  Comment 
Firm’s valuation set to rise after notification on deferred tax liability
The Hindu Business Line  Feb 7  Comment 
The Hindu Business Line  Feb 6  Comment 
Tata Chemicals reported that its consolidated net profit more than doubled to ₹832 crore (₹318 crore) on the back of deferred tax write back of ₹250 crore due to lowe
Channel News Asia  Feb 6  Comment 
General Motors Co on Tuesday posted a loss due to a US$7 billion non-cash charge related to deferred tax assets, but excluding items reported earnings well above Wall Street expectations.
MarketWatch  Jan 9  Comment 
Target Corp. said Tuesday that its raised outlook adjusted earnings per share of $1.30 to $1.40 for the fiscal fourth quarter, that runs through January, includes a 6 cents-to-8 cents benefit from the recently enacted tax legislation. The...
Mondo Visione  Jan 5  Comment 
The Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight announced today that it has issued no-action relief to registered futures commission merchants and introducing brokers to exclude deferred tax...


Deferred tax assets (or liabilities) show investors the value of steps a company has taken which strengthen or weaken its future tax position. A deferred tax asset represents some tax advantage the company will benefit from in the future, while a deferred tax liability represents some additional tax penalty the company believes it is exposed to down the line.

Deferred tax assets can arise for a number of reasons:

  • Operating Losses: Deferred Tax Assets are the silver lining for a company that is otherwise losing money. Because losses today count against any profits the company might earn in the future, these losses, while bad, create an asset in the form of a lower tax bill down the road. For example, if a company lost $10 million today, in the future, its next $10 million in profits would be tax-free -- it would only pay taxes once it recouped its losses. As a result, a company that ceases operations after large losses is not entirely worthless - another company could swoop in and buy the distressed company for its deferred tax assets, and use these assets to offset its own future profits for tax purposes. However, these losses can only be carried forward for tax purposes for seven years - so if the company doesn't earn $10 million within seven years of its initial $10 million loss, it would lose any remaining tax benefit from this loss.
  • Differences in the timing of revenue recognition between tax and accounting calculations: Sometimes the rules set by tax authorities for when a company accrues revenues and expenses for tax purposes deviate from generally accepted accounting principles. For example, a company that sells extended warranties will estimate, in advance, how much it will have to pay to fix broken items in the future. For income reported to investors, it subtracts out these expected payments in advance, reducing its income. However, the IRS won't allow it to claim these losses against its income until it actually has to pay them out, years down the line. So, the income the company reports to the IRS is larger than what it reports to shareholders, increasing its tax bill in the short term. Because this difference in reported income is a timing issue -- when should the payments to fix broken merchandise be recognized? -- in the long term both the calculations reported to the IRS and those reported to shareholders should match up. If the company's estimates on how much it will have to pay to fix broken merchandise are correct, it will eventually pay out that amount, and its tax bill in the future will be lower as a result of those expenses. Therefore, the company reports this expected future tax benefit as a deferred tax asset in order to show investors the tax benefit, tomorrow, that arises from pre-payment of taxes today.

Valuation Allowance

Sometimes, a company expects it will not be able to realize the the benefits of its deferred tax assets. For example, If a company loses $10 million, it would record a deferred tax asset representing the decrease in taxes on its next $10 million in earnings. However, if the company doesn't expect profits for the next several years, and doesn't expect to earn $10 million in the seven-year time horizon before these deferred tax assets expire, it can't record them at full value - because the company won't be able to take advantage of this tax benefit.

If a company expects there is more than 50% chance it will not be able to realize some of its deferred tax assets (because it future income won't be large enough to take full advantage of these tax breaks), it must report a valuation allowance to account for this.

A valuation allowance depends a great deal on management assumptions - who's to say how high a company's future profits will be, and therefore whether the company will be able to take advantage of its deferred tax assets? If management changes its assumptions about future earnings, the valuation allowance changes, and the difference is reported as earnings, today. So, management at companies with valuation allowances can directly change reported earnings today by changing assumptions about earnings tomorrow. Changing a valuation allowance is one way that management can manage or manipulate its earnings.

Please install Flash Player to view this chart.
Please install Flash Player to view this chart.
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki