For most businesses, the goal is to maximize profits while minimizing costs. One of the ways that a company can achieve this is by deferring income or tax assets that are reported to the Internal Revenue Service. This deferral allows the company to maximize the amount of recoverable income taxes for future periods of earnings.
Recoverable income tax is the amount of money a company can expect to receive back from federal or state government as a result of a deferral of tax credits and losses. While each business is required to report the amount of revenue, or income it makes within a given tax year, this amount does not have to be equal to the amount reported on a company's balance sheet, or accounting records. A business may decide to defer use of tax benefits until they are most beneficial.
Items such as accounts receivable, physical capital, investments and inventory are usually considered assets, or those things that add to the value of the business. In contrast, accounts payable, payroll and debt obligations are considered liabilities, which decrease the overall value or profit of the company. If a company has a small profit during a given tax year, it may decide to carry forward its liabilities to the following year until it has a higher income with which to maximize its recoverable income tax.
A business may earn tax credits from many sources including "Input Tax Credits," or tax paid on items used in the creation of final products, or Value Added Tax paid on goods and services purchased abroad. While VAT is fully recoverable, "Input Tax Credits" are typically only partially recoverable. However, both can be applied to a companies income to reduce tax liability and increase the amount of recoverable income tax.
According to the International Accounting Standards Board, a business's unused tax losses and credits can be be utilized only when a company has a sufficient amount of taxable income in the future. Likewise, businesses are only allowed to carry forward a certain amount of tax assets during each given tax year and may be subject to review by tax authorities if the amount claimed does not match up with reasonably expected income projections.