# Deferred Tax Asset question

I am having trouble grasping this concept. A DTA arises when tax expense (reported by the company) > taxes paid (to the government) right? I am getting hung up on this question, possibly because my understanding is wrong.

If a company has a deferred Tax Asset reported on it’s statement of financial position and the tax authorities reduce the tax rate, which of the following statements is most accurate concerning the change? The existing deferred Tax Asset will:

A decrease in value

B not be affected

C increase in value

I guessed C but the answer is A, my mindset being if you already have a DTA and your tax rate is decreased, your DTA will increase because there is a bigger difference compared to the new rate. Obviously this is wrong.

Can someone please clarify this for me?

Thanks!!

Wrong.

A DTA arises when a temporary difference between financial reporting and tax reporting will lead to _lower taxes in the future _; therefore, higher taxes today.

Suppose that you wrote down an impaired asset for \$10,000 today, and that your marginal tax rate is 30%. You don’t get that write-down on your tax return – impairment isn’t a taxable event – so you pay \$3,000 more in taxes this year, but you expect that you’ll pay \$3,000 less in the future when you sell the asset; you record a DTA of \$3,000 (= 30% × \$10,000).

Next year, the marginal tax rate is dropped to 25%. That \$3,000 you thought that you were going to save is now only \$2,500 (= 25% × \$10,000): your DTA lost \$500 of value.

That makes sense!! Just to clarify for a DTL then you would pay less taxes now and will have to pay more in the future?

If the company has a DTL(pay less now to pay more in the future​)

\$10,000*10%=\$1,000

Tax authorities raise rates to 25%

\$10,000*25%=\$2500

So your DTL would increase in value by \$1,500?