What are deferred tax assets?

Deferred tax assets represent future tax benefits arising from temporary differences between the accounting income recorded on financial statements and the taxable income reported to tax authorities. These assets are created when a company has paid more tax in the current period than its taxable income reflects, often due to timing differences in revenue and expense recognition.

For example, if a company recognizes certain expenses for accounting purposes this year but is not allowed to deduct them for tax purposes until a future year, it will create a deferred tax asset. Essentially, the company can expect a reduction in future tax payments as these temporary differences reverse. This means that deferred tax assets will provide a tax benefit that the company can realize in the future, making them an important aspect of a company's financial strategy.

Other options do not align with this concept. Immediate tax liabilities relate to amounts due currently, while employee compensation costs are not inherently classified as tax assets or liabilities. Permanent disallowed tax deductions do not generate future tax benefits, thus contrasting with the definition of a deferred tax asset.