Puritan Corp. reported the following pretax accounting income and taxable income

Question

Puritan Corp. reported the following pretax accounting income and taxable income for its first two years of operations: 2015 $350,000 (600,000) 2016 Puritan's tax rate is 40% for all years. Puritan elected a loss carryback for the loss in 2016. As of December 31, 2016. Puritan was not certain that it would recover any of the tax benefit of the remaining operating loss carryforward to 2017. What would Puritan report on December 31, 2016, as the deferred tax asset net of the valuation allowance with respect to the NOL carryforward? Select one: A. $280,000. O B. $100,000. C. $200,000. O D. $0.

Explanation / Answer

Answer: Option D. $0

Since Puritan is not certain that it will recover any of the tax benefit of the remaining loss carryforward, it will create a valuation allowance to the extent of the entire deferred tax asset. Hence the deferred tax asset in the balance sheet on December 31, 2016 net of the valuation allowance will be $0.

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