Not investment advice. Educational reading. See Disclaimer.
L.12 · INTERMEDIATE · 2 MIN
Deferred Taxes: Why Tax Expense Differs from Taxes Paid
A company's income tax expense on the income statement almost never equals what it actually pays the IRS. The difference creates deferred tax assets and liabilities.
A large DTA from net operating losses means the company can earn future profits tax-free until the DTA is used up. This can be very valuable, but only if the company actually becomes profitable.
§ 03Key insight
Effective tax rate (tax expense / pre-tax income) is more useful than the statutory rate for comparing companies. Rates below 15% may indicate aggressive tax planning or large DTA offsets.
§ 04Check-in
Company reports tax expense $100M. Cash taxes paid: $60M. Difference?
Check your understanding
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Sit with the ideas.
A company has $200M in deferred tax assets from NOL carryforwards. It has lost money for three consecutive years. Its new CEO announces the DTA is 'more likely than not' to be realized and releases the valuation allowance, boosting net income by $200M. Should you trust this?
