Recording Deferred Tax Assets: 7 Effective Journal Entry Tips

A deferred tax asset journal entry is a key tool companies can use to reduce their financial burdens. With this one accounting method, you can keep your tax burden a little lower for now while ensuring you pay what you owe when it’s due.

Accountants must follow rules set by the Financial Accounting Standards Board (FASB). This not-for-profit organization establishes reporting standards for public companies, private companies, and not-for-profit organizations.

The FASB created Accounting Standards Codification 740 (ASC 740) that dictates how both public and private businesses create financial statements under U.S. Generally Accepted Accounting Principles (GAAP). Deferred tax assets are an important part of GAAP.

What Is a Deferred Tax Asset Journal Entry?

In a simple scenario, a company has only assets that are taxable in the same year. In reality, most companies have a mixture of assets that are taxable right now and others that might become so in the future. A deferred tax asset is something that isn’t taxable right now.

Deferred tax assets can be things like net operating losses, business expenses, and bad debt. They can also stem from recognized taxable income that isn’t recognized by your particular accounting method.

Why would you list something like this? It’s a good question. Typically, companies use deferred tax asset journal entries because they want to provide information to investors or potential donors. A deferred tax asset journal entry offers a more complete picture of the health and stability of your organization, so it’s a critical piece of data.

7 Deferred Tax Asset Journal Entry Tips

Most accountants are well-versed in deferred tax asset journal entries. However, there are good and bad ways to tackle this important accounting task. These tips may help.

1. Recognize What Counts as a Deferred Tax Asset

Ensure that you’re using this approach for the right data points. For example, a deferred tax asset is rarely a physical object. For example, you wouldn’t use this approach for something like a new tractor or company van. Instead, a deferred asset is typically something mathematical that’s only listed on your balance sheet.

2. Assess the Validity

A deferred tax asset should be something that will, in time, come with an economic benefit. You should be able to pinpoint a year when the deferred asset could be carried back, and you should understand the tax effect at that time. You should also be able to identify actions you’d undertake to ensure the deferred tax asset doesn’t expire before you use it.

3. Prepare for the Worst

Sometimes, a deferred tax asset isn’t recognized or authorized by the taxing agent. If you’re taking a risk by using a deferred tax asset journal entry, you may be required to record a valuation allowance—money set aside to pay the taxes if needed.

4. Watch for Upcoming Tax Rate Changes

If the taxing authority changes the rates, your deferred tax asset will change as well. It’s important to keep an eye on the rules and regulations, so your journal entry includes the taxable rate that might apply when it’s time to use it.

For example, the Tax Cut and Jobs Act changed corporate business taxes significantly, and some of those shifts are permanent. Companies with deferred tax assets had to scramble to ensure their journal entries were accurate.

5. Asses Your Deferred Liabilities

Some businesses have both deferred assets and deferred abilities. If you identify them both, they could cancel one another out. For example, if you have a deferred tax asset (profit losses) of $100,000 and a deferred tax liability (from a property exchange) of $50,000, you can offset the liability against the asset, resulting in a net deferred tax asset of just $50,000. This results in a reduction of the total deferred taxes you have to repay, which could make your statements clean and crisp.

6. Plan for Future Taxes

Some business decisions could affect your overall deferred tax assets. For example, if you sell some assets or change your accounting methods, this could change the overall picture for deferred tax assets. Ensure that you’re aware of these pitfalls as you write your deferred tax asset journal entries, so you don’t create problems down the road.

7. Hire an Accountant

While following these tips can ensure that you take advantage of the opportunities involved with deferred tax assets, know that these processes are complicated. It’s always smart to hire an expert to assist you. An estimated 87,261 accounting services are available in the United States. If you haven’t hired one yet, it’s wise to do so.

Explore Your Tax Benefits

Every company must pay taxes. That’s a simple fact. However, you can use tools to reduce how much you must pay and when the bill comes due. A 1031 exchange is one such tool you could put to good use. An exchange transaction allows you to sell one business property and purchase another while deferring the taxes that should be due on the sale. If exercised appropriately, a 1031 exchange can be a wise investment tool.

At 1031 Pros, we specialize in these complex transactions. We can handle simple exchanges and more advanced trades (such as a 1031 exchange involving a vacation home). Contact us to get started.