Which if the following is the possible source of taxable income may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards?

Question

Options

• AFuture reversals of existing taxable temporary differences
• BFuture taxable income exclusive of reversing temporary differences and carryforwards
• CTaxable income in prior carryback year(s), if carryback is permitted
• DAll of the above

• A
  2% (1)
• B
  4% (2)
• C
  11% (5)
• D
  82% (37)

Explanation

Option D is correct because all three listed sources are recognized under ASC 740 as valid evidence that a deferred tax asset (arising from deductible temporary differences and carryforwards) can actually be realized. None of the individual options are wrong - A, B, and C each represent a distinct, legitimate avenue for realizing a tax benefit, and the standard requires considering all of them when assessing the need for a valuation allowance. Future reversals of existing taxable temporary differences (A) provide built-in future taxable income that offsets deductible amounts. Future taxable income from ongoing operations (B) represents projected profitability, while carryback to prior profitable years (C) allows immediate refund recovery when permitted by law. A helpful memory tip: think of the acronym FFC - Future reversals, Future income, Carryback - all three must be evaluated before concluding a deferred tax asset cannot be realized and a valuation allowance is needed.

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