If a valuation allowance is increased in the current year, the corporation's effective tax rate is higher than if the valuation allowance had not increased.

Question

Quizplus · Accepted Answer

When a corporation increases its valuation allowance, it is essentially acknowledging that it is more likely than not that some or all of its deferred tax assets will not be realized in the future. As a result, the corporation will record a higher income tax expense in the current year, which will increase its effective tax rate. This is because the deferred tax assets are no longer available to offset taxable income, and therefore the corporation will owe more in taxes.

If a Valuation Allowance Is Increased in the Current Year