Quick Finance Tip - Deferred Tax Assets (DTA) and Valuation Allowance

Deferred Tax Assets (DTA) appears on the Balance Sheet when excess amounts are paid for income taxes and the company expects to recover the difference during future operations.

A Valuation Allowance is a reserve created against DTAs and is based on the likelihood of realizing the DTAs in future accounting periods. A valuation allowance will hit the P&L as income from continuing operations, assuming the company is able to recognize gains or positive income for current performance. This all means that a company is able to use any Net Operating Losses (NOLs) or other tax benefits from the past.