This free, guided checker walks your finance team through the key decision points for ASC 740 Deferred Tax Valuation Allowance. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Common sources of DTAs include net operating losses, tax credits, accrued liabilities, deferred revenue, and stock compensation. Assess by jurisdiction and by character (ordinary versus capital).
No deferred tax assets exist, so no valuation allowance assessment is required this period (ASC 740-10-30-5).
Official guidance: FASB Accounting Standards Codification
Realization is tested by character: an ordinary deferred tax asset must be supported by ordinary taxable income, and a capital attribute by future capital gains of the right character and timing. Separate the deferred tax assets by character and by jurisdiction before weighing the sources of taxable income, because a surplus of ordinary income cannot support a capital loss carryforward. The common trap is assessing realizability on a combined, entity-wide basis and overstating the support for capital attributes.
Capital-character deferred tax assets are realizable only against future capital gains; assess realizability against that limited source (ASC 740-10-30-18).
Official guidance: FASB Accounting Standards Codification
Reversing taxable temporary differences and carryback capacity are the most objective of the four sources of taxable income in ASC 740-10-30-18 and can support realization even when other evidence is weak.
Objectively verifiable sources support full realization; no valuation allowance is required (ASC 740-10-30-18).
Official guidance: FASB Accounting Standards Codification
A three-year cumulative loss is significant objective negative evidence under ASC 740-10-30-21 that is difficult to overcome with subjective forecasts alone (ASC 740-10-30-23). The three-year window is a practical benchmark, not a bright line.
Use the interactive tool above to see how this applies to your situation.
Official guidance: FASB Accounting Standards Codification
The more significant the negative evidence, the more objectively verifiable the positive evidence must be (ASC 740-10-30-23). Forecasts of future income generally carry little weight against a cumulative loss.
Significant negative evidence is not overcome; record a valuation allowance for the deferred tax asset (ASC 740-10-30-23).
Official guidance: FASB Accounting Standards Codification
The four sources in ASC 740-10-30-18 are (1) future reversals of existing taxable temporary differences, (2) future taxable income exclusive of reversals, (3) taxable income in available carryback years, and (4) tax planning strategies that are prudent and feasible.
Realization of the full deferred tax asset is more likely than not; no valuation allowance is required (ASC 740-10-30-5(e)).
Official guidance: FASB Accounting Standards Codification
The valuation allowance reduces the deferred tax asset to the amount that is more likely than not to be realized (ASC 740-10-30-5(e)); it is not an all-or-nothing test.
Record a partial valuation allowance to reduce the DTA to the amount more likely than not to be realized (ASC 740-10-30-5(e)). Record a full valuation allowance against the deferred tax asset (ASC 740-10-30-5(e)).
Official guidance: FASB Accounting Standards Codification
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