NYT 6.14

Applying the More-Likely-Than-Not ThresholdUncertain Tax Positions Facts: A newly formed entity has incurred net operating losses for its first 2 years in operation. However, it has seen a consistent increase in customers and improving gross profit margins year-over-year. The company believes it can record a deferred tax asset or liability (that is, the net operating losses reported in its first two tax returns can be used to offset future years taxable income). However, realizing the benefit of its net operating losses depends on having positive future taxable income. The company believes it is probable (or at least 75% likely) that its third and fourth years of operations will result in positive taxable income. Companies have a 20-year period in which net operating losses may be applied against future taxable income. Historically, the companys owners (in previous endeavors) have not let loss carryforwards expire unused. The company must determine whether this carryforward meets the more-likely-than-not threshold for recognition. The basic principles regarding this issue are outlined in par. 25-6 and 25-7. Additionally, consider the following glossary and implementation guidance from ASC 740-10: Carryforwards (ASC 740-10-20) Deductions or credits that cannot be utilized on the tax return during a year that may be car- ried forward to reduce taxable income or taxes payable in a future year. An operating loss carryforward is an excess of tax deductions over gross income in a year; . . . 55-7 Subject to certain specific exceptions . . . a deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards . . Carryforwards (ASC 740-10-20) Deductions or credits that cannot be utilized on the tax return during a year that may be carried forward to reduce taxable income or taxes payable in a future year. An operating loss carryforward is an excess of tax deductions over gross income in a year Subject to certain specific exceptions a deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards (ASC 740-55-7)

1. Does the companys operating loss carryforward appear to meet the more-likely-than-not threshold for recognition? Explain why this does or doesnt seem appropriate.

2. How shall the loss carryforward be reported (as a deferred tax asset or liability)?