What is a deferred tax asset?

A deferred tax asset arises when there are temporary differences between accounting profit and taxable profit, leading to taxes that have been paid or are due that can be recovered in the future. Essentially, it reflects a situation where a company has overpaid its taxes or has had tax deductions that it can utilize in the future when the taxable income exceeds the accounting profit.

For example, if a company reports an expense in its accounting records that is not yet deductible for tax purposes, this creates a temporary difference, resulting in a deferred tax asset. Over time, as the differences reverse—often when the company recognizes the expense for tax purposes—this asset will be realized, providing future tax relief.

The other choices do not accurately define a deferred tax asset. The option referring to unrecognized profits does not capture the essence of what constitutes deferred tax assets. Similarly, an option claiming it represents future taxable income fails to recognize that deferred tax assets rather provide future benefits related to taxes that can be offset against future taxable profits. The assertion that it is an expense for tax purposes is fundamentally inaccurate, as a deferred tax asset represents a future benefit, rather than an immediate expense.