An asset, recorded on the balance sheet of an entity as a prepaid item, representing taxes that have been already paid in advance (i.e., it is not incurred). Differences between income taxes paid and the actual tax amounts payable necessitate adjustments to the prepaid tax accounts. Such differences come up primarily through the use of accelerated methods of depreciation for tax.

Generally speaking, a deferred tax liability (DTL) or deferred tax asset (DTA) is created when there are time-bound, or period-to-period, differences between book tax and actual income tax. Such differences between pre-tax book income and taxable income result from multiple types of transactions with tax authorities and relevant stakeholders.

Prepaid taxes (arising from overpayment of taxes) reduce an entity’s taxable income in the future. The amount of prepaid taxes will eventually be utilized in the form of tax relief.

It is recorded on the balance sheet as a line item asset.

It is also called a deferred income tax asset (though technically the two concepts differ in terms of time span).