What is a deferred tax asset and why might one be created?

Answer 1

Let's break this down: an asset is something that has value to you. A tax asset would therefore be an asset that reduces your taxes. Something that is deferred is something that will happen in the future. Therefore a deferred tax asset is something that will give you a tax benefit (a reduction in earnings) in a future year. How does this happen? The most common case is one in which revenue is recognized for tax purposes in a year earlier than actually realized in the income statement. This results in less taxes paid in the year that the income is realized, since the tax was already paid in the previous year. While this can occur merely because of differences in the period of recognition, one can imagine setting up a situation in preparation for a heavy tax year in the future.