Question
XYZ Company has a 3-year cumulative loss position of ($20,000). XYZ Company has historically had reliable and accurate forecasts and the engagement team has tested
XYZ Company has a 3-year cumulative loss position of ($20,000). XYZ Company has historically had reliable and accurate forecasts and the engagement team has tested the Company's forecasting process. Consider the following: Gross deductible temporary differences at 12/31/CY of $250,000, related to net operating loss carryforwards that do not expire. XYZ Company entered into a significant new agreement during the year with a 3rd party which is expected to continue to generate a profit in future years. The engagement team has tested this agreement and its impact on management's future projections which was deemed reasonable. Forecasted pre-tax book income of $150,000 for 12/31/CY+1. This level of income is expected for the next 5 years. The applicable tax rate is 21% for the current and future years. Which do you recommend: a full, partial, or no valuation allowance for 12/31/CY?
A. Partial valuation allowance: The fact pattern does not meet the more-likely-than-not standard
B. Full valuation allowance: XYZ Company is in a 3-year cumulative loss position
C. No valuation allowance: Realization of the DTA is more likely than not given the possible sources of taxable income
D. Partial valuation allowance: The forecasted pre-tax income is not sufficient to realize the deferred tax assets at 12/31CY
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