Deferred Tax Asset Valuation Allowance: When Is the DTA Reduced?
Recognizing a deferred tax asset and realizing its benefit are two separate questions.
Deferred tax asset
A DTA can arise from deductible temporary differences, operating-loss carryforwards, or tax-credit carryforwards when future tax benefits are expected under the applicable tax rules.
Valuation allowance
A valuation allowance reduces the recorded DTA when available evidence indicates that realization of some or all of the tax benefit does not meet the required recognition threshold.
Evidence
Questions can include both positive and negative evidence, such as cumulative losses, future taxable income, reversals of taxable temporary differences, and tax-planning strategies.
Exam strategy
Do not ask only whether the tax benefit exists. Ask whether the entity is sufficiently likely to realize it.
The takeaway
A DTA records a potential future tax benefit; a valuation allowance reduces that asset when realization is not sufficiently supported.
Related Summit resources
FAQ
Does every DTA require a valuation allowance?
No.
Can cumulative losses be relevant evidence?
Yes.
What is the core second-step question?
Whether the deferred tax benefit is expected to be realized.