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Chapter 5 — Valuation Allowances

5.3 Sources of Taxable Income

5.3 Sources of Taxable Income

To assess whether DTAs meet the more-likely-than-not threshold for realization, an entity needs to consider its sources of future taxable income. Taxable income of the appropriate character (e.g., capital or ordinary), within the appropriate time frame, is necessary for the future realization of DTAs.

Footnotes

3
The conclusion reached in this example would have been the same even if the NOL’s carryforward period had been indefinite.
4
The CARES Act temporarily eliminated the 80 percent limitation for NOLs used in taxable years beginning before January 1, 2021. It also temporarily increased the business interest expense limitation from 30 percent to 50 percent for taxable years beginning in 2019 and 2020 and allows entities to elect to use their adjusted taxable income for the last taxable year beginning in 2019 as their adjusted taxable income for taxable years beginning in 2020. As a result, entities will need to consider how this temporary change affects their previous conclusions about the realizability of deferred taxes. For example, an NOL used in 2019 will not be limited to a percentage of taxable income and thus an indefinite-lived taxable temporary difference reversing in 2019 will not be limited as a source of taxable income with respect to this NOL. For further information about the CARES Act and the subsequent income tax accounting, see Deloitte’s April 9, 2020 (updated September 18, 2020), Heads Up.
5
The projections referred to here are management’s estimates of future income based on metrics and qualitative information used by the entity, which might include future growth assumptions and other subjective management assertions.
6
ASU 2016-13 was issued in June 2016 and significantly amends the guidance in U.S. GAAP on the measurement of financial instruments. In November 2019, the FASB issued ASU 2019-10, which established the following effective dates for ASU 2016-13: for public business entities (PBEs) that meet the U.S. GAAP definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods therein. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2022, and interim periods therein. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
7
Indicates a source of evidence that can be verified objectively
8
See footnote 7.
9
See footnote 7.