I just read about deferred tax assets, which is a concept many entrepreneurs overlook. But this could be a game changer for business cash flow.

So here’s the deal, there are two important things in corporate taxes: tax assets and tax liabilities. Liabilities are what we owe, while assets are what we can use to reduce tax burdens. Now, deferred tax assets are items on the balance sheet formed from overpaid taxes or prepayments. Basically, it’s like an overpayment that we can store and use in the future.

Why does this happen? There are several ways. First, from business losses – we can record capital losses and carry them forward to the next year. Second, from differences in how asset depreciation is calculated. For example, real estate, different methods and rates can cause us to pay more taxes. Third, from business expenses recorded in the income statement earlier than in the tax statement. Fourth, from warranties – if the company sets aside money for warranties, it’s still taxed, creating a gap on the balance sheet.

Now, deferred tax assets are intangible assets that can be stored on the balance sheet indefinitely since 2018. How to use them? For example, if a company has $3,000 in deferred tax assets and a liability of $10,000 with a 30% tax rate, that means a tax payable of $3,000. Then, it can reduce the liability to $7,000, making the total tax $2,100. Saving $900.

Unlike deferred tax liabilities, which arise from underpayment or delayed payments. For example, selling installment products 5 times, $2,000 per installment. Recorded as $10,000, but only paid $2,000. So, there’s $8,000 in future taxable income. With a 30% rate, that’s a deferred tax liability of $2,400.

In summary, deferred tax assets are an important tool for tax planning. They usually arise from differences between business accounting methods and tax accounting. For entrepreneurs, it’s crucial to understand this to optimize cash flow and tax strategies. If you need more detailed guidance, it’s better to consult with a tax accountant or financial advisor who specializes in business.