What creates a deferred tax asset (DTA)?

The creation of a deferred tax asset (DTA) is linked to the concept of future tax benefits that arise from losses that have been incurred in the past. When a company experiences a loss, it can often use that loss to offset future taxable income, which leads to a reduction in taxes that will be payable in future periods. This prospective tax advantage from prior losses results in the recognition of a deferred tax asset on the balance sheet.

In essence, a DTA reflects the anticipated future tax savings that the company expects to realize due to these past losses. It represents a potential reduction in future tax payments, allowing the company to benefit financially from its earlier challenges. This concept is fundamental in accounting, as it allows businesses to better manage their tax liabilities over time. The other choices do not accurately define the condition under which a DTA is created.