Deferred Income Tax Assets In light of Daniel Tellechea's response “So, those would just be the timing adjustments on deferred income tax, etc“ to an analyst's CC question regarding Largo’s “deferred income tax expense”, let’s explore a bit more about this subject.
Q1-23 (US$)
Net Income before tax = $715K
Income Tax Expense = ($333K)
Deferred Income Tax = ($1,589K)
Net Loss = ($1,207)
Questions
Why does Largo have to book an Income Tax Expense of ($333K) out of an net income of $715K? What is the income tax rate?
What is the nature of the ($1,589K) in Deferred Income Tax?
Note:
On Largo’s balance sheet there is a Current Assets item called “Deferred Income Tax Asset” with a balance of $3,035K (see below).
Net deferred income tax asset, beginning of the period = $4,596K
Deferred income tax expense = ($1,589)
Effect of foreign exchange = $28
Net deferred income tax asset, end of the period = $ 3,035
So let explore a bit more about Deferred Income Tax Assets from where an amount of ($1,589) came from and used as a deferred tax expense to turn Q1-23 Net Income into a Net Loss.
Excerpt from Investopedia
Understanding Deferred Tax Assets
A deferred tax asset is often created when taxes are paid or carried forward but cannot yet be recognized on the company's income statement. For example, deferred tax assets can be created when the tax authorities recognize revenue or expenses at different times than those periods that the company follows, per an accounting standard. These assets help reduce the company’s future tax liability….
A deferred tax asset might be compared to rent paid in advance or a refundable insurance premium. While the business no longer has the cash on hand, it does have its comparable value, and this must be reflected in its financial statements.
One straightforward example of a deferred tax asset is the carryover of losses. If a business incurs a loss in a financial year, it usually is entitled to use that loss in order to lower its taxable income in the following years.3 In that sense, the loss is an asset. Another scenario arises when there is a difference between accounting rules and tax rules. For example, deferred taxes exist when expenses are recognized in a company's income statement before they are required to be recognized by the tax authorities or when revenue is subject to taxes before it is taxable in the income statement. Essentially, whenever the tax base or tax rules for assets and/or liabilities are different, there is an opportunity for the creation of a deferred tax asset.
Do Deferred Tax Assets Carry Forward?
Yes. Beginning in 2018, taxpayers could carry deferred tax assets forward indefinitely. They never expire and companies use them when it's most beneficial to do so.
Deferred tax assets help reduce the company’s future tax liability?
Deferred tax assets never expire and companies use them when it's most beneficial to do so?
So why did Ernest Cleave use $1,589K of Largo’s Deferred Income Tax Assets not to reduce but to increase the company’s tax expenses to the point that the Net Income before tax turned into a Net Loss after tax (($1,207) in Q1-23?
Don’t we want a better explanation than the stupid reply “So, those would just be the timing adjustments on deferred income tax, etc. So that it's not a one for one relationship, which is why you get the movement and deferred income tax, but it's pretty conventional” given by Daniel Tellechea in the Q1-23 Earnings CC?