ACCY 113 3/24/25 notes: Accounting for Income Taxes: Valuation Allowances and Deferred Tax Assets

Introduction to Deferred Tax Assets (DTA)

• Accounts receivable are considered assets.

• If part of it is estimated as uncollectible, a valuation allowance is set up.

• In tax accounting, we need to evaluate if it is more likely than not (greater than 50%) that future taxable income will be available to use DTA.

Valuation Allowances for Deferred Tax Assets

• Valuation allowances are assessed to determine the realizable portion of DTA.

• Rules around tax liabilities create either future taxable amounts or deductible amounts.

• Deferred Tax Asset (DTA): Expectation of being able to deduct a future expense, aiding in reducing taxable income.

• Deferred Tax Liability (DTL): Obligation to pay tax in the future, resulting in higher taxable amounts.

Estimating Future Taxable Income

• Evaluate if there’s enough future taxable income to benefit from deductions.

• Accountant judgment is necessary to ascertain the probability of utilizability.

Recording Deferred Tax Assets

• Must use a valuation allowance account to account for sections of DTA that cannot be used.

• This allowance is contrary to the DTA, functioning to write down the asset when necessary.

Example Calculation of DTA

• Applying the concepts through an example, estimating the net DTA.

• Show how a gross amount is adjusted by a valuation allowance, impacting the balance sheet.

• Explore journal entries that reflect these changes.

Taxable Income Influence on DTA

• Discuss relevant tax rate applications when computing income taxes payable and tax expenses.

• Future taxable amounts from DTA calculations need adjustment, emphasizing the influence of pre-tax and after-tax elements.

Taxable Losses and Carryforwards

• Discussion around taxable losses (referred to as net operating losses) and their implications.

• Tax code allows indefinite carryforward but limits the offset to 80% of taxable income in any year.

• Understanding how these create deferred tax assets which reduce tax liabilities in future years.

Recording Taxable Loss and DTA

• Example of budgeting a taxable loss and understanding its impact on DTA.

• Calculate desired ending balance in DTA based on losses and the tax rate.

Balance Sheets and Closing Entries

• Importance of setting up correct balance sheet entries based on tax calculations.

• Carryforwards and their use in maximizing benefits of deferred taxes.

Inter- versus Intra- Period Tax Allocation

• Differentiate between how taxes are allocated across periods versus within a single period.

• Review examples of how income statements are laid out moving from revenues to tax impact.

Statement Review

• Walkthrough of a simplified income statement and its components, stressing the importance of timing with taxes.

• Emphasis on comprehensive income and the implications of losses, taxes, and unrealized gains.

Conclusions and Advice

• Reflect on personal experience in learning accounting and the necessity of diligent study.

• Encourage students to engage actively in the learning process to succeed in exams.