Part 3 Interim Reporting Additional Facts

Assume that a valuation allowance of $100 million is recorded as of December 31, 2018 ($150 million DTA less $50 million reversing DTLs).

Further assume that the actual 2019 net income before tax was $0 as projected at the end of 2018 and that the $100 million valuation allowance is still needed as of December 31, 2018 (i.e., the future forecast of income is not considered objective and verifiable). In calculating the 2020 annual effective tax rate (AETR) at the beginning of the year, the Company projected income before taxes of $40 million ($10 million per quarter). With the effective tax rate of 21 percent, the $40 million of income would result in a tax provision of $8.4 million during 2020 ($2.1 million per quarter) before consideration of the release of the valuation allowance.

Assume, however, that the net operating loss carryforwards will be used as income is generated during the year, resulting in annual estimated tax of $0 and an annual estimated effective tax rate of 0 percent. In the absence of a release of the valuation allowance during 2020 from a change in estimate, and provided there are no other changes in deferred taxes, the year-end valuation allowance would be $91.6 million ($100 million less $8.4 million) as a result of the income earned in 2020.

In the second quarter of 2020, Condidas determined that there was sufficient evidence of future taxable income to conclude that the DTA was more likely than not to be realized.

8. Calculate the tax provision (benefit) that would be recognized in the second quarter of 2020.