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If you're an investor in Citigroup (C +0.29%) then you may have come across references to its deferred tax assets. These assets may seem esoteric, but they're easy to understand and are incredibly important.
Deferred tax assets explained
A deferred tax asset comes about when a company reports more in losses in a particular year than it can claim as a deduction on its corporate income tax statement for the same year. If this happens, a company can carry the loss forward, applying it against future income and thereby reducing its future tax liability.
The way a company accounts for this is through a deferred tax asset, which is recorded as an intangible asset on the balance sheet. As time passes, the former losses are used to offset future income, thereby decreasing the size of the deferred tax asset.
One thing to keep in mind about deferred tax assets is that they don't exist in perpetuity. They have to be used within a set period of time, else they expire and can no longer be claimed on the income statement to offset a company's future tax liability. Generally speaking, they last for 20 years.
Citigroup's deferred tax asset
No company benefits more from deferred tax assets than Citigroup. In a single year during the financial crisis, it recorded a $53 billion operating loss -- see page 116 of its 2008 income statement here. It followed this up with a nearly $8 billion operating loss the next year.
Given the magnitude of these losses, Citigroup was obviously unable to deduct all of them in the years in which they occurred. The New York-based bank thereby recorded them as deferred tax assets on its balance sheet. At their peak valuation in 2012, they were valued at $58 billion.
Data source: Citigroup's regulatory filings. Chart by author.
Over the last few years, Citigroup has been slowly but steadily whittling away at its deferred tax assets, using them to lower its effective tax rate. Last year, for instance, it used $1.5 billion worth of its past losses to lower its 2015 taxable income.
This leaves Citigroup with gross deferred tax assets valued at $51 billion -- though if you exclude deferred tax liabilities, the number drops to $48 billion. Suffice it to say, while the losses certainly weren't pretty when they occurred, this enables Citigroup to reduce its taxable liability for the next dozen years at which point they'll expire.
It's for this reason, in turn, as corporate income taxes are one of a bank's principal expenses, that Citigroup's deferred tax assets are so important for its shareholders to understand and appreciate.
