Valuation Allowance
Reducing Deferred Tax Assets
A deferred tax asset is recognized only if it is more likely than not that the tax benefit will be realized. If realization is uncertain, a valuation allowance reduces the deferred tax asset to the amount expected to be realized.
- Future taxable income expectations.
- Tax planning strategies.
- History of operating losses.
- Expiration of tax carryforwards.
Note
The valuation allowance is a contra-asset account that reduces the reported deferred tax asset.
Tip
Remember the phrase 'more likely than not' when evaluating deferred tax assets.
Summary
Deferred tax assets must be reduced if future realization is not considered more likely than not.