What are deferred tax assets?

Deferred tax assets represent future tax benefits that a company can recognize on its balance sheet. Specifically, they arise from temporary differences between the accounting treatment of certain items and their treatment under tax laws. These differences lead to future tax recoveries, often because expenses that are deductible for tax purposes have been recognized in financial accounting but not yet deducted in the current tax period.

In essence, when a company has deductible temporary differences, it can expect to reduce future taxable income, leading to lower tax payments in the future. This is reflected in the financial statements as a deferred tax asset, indicating that the company has a right to future tax refunds because of these accumulated deductible differences.

This is contrasted with other options that focus on different financial concepts. While options involving refunds and credits may sound related, they do not accurately describe the nature of deferred tax assets. Instead, deferred tax assets specifically pertain to future deductions that will effectively reduce a company’s taxable income when realized.