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

Question

Quizplus · Accepted Answer

When a valuation allowance is increased, it means that the corporation anticipates lower future earnings, which will result in less tax liability in the future. However, in the current year, the increased valuation allowance reduces the corporation's taxable income, which means they will pay less in taxes. But because the increase in valuation allowance implies lower future earnings, the effective tax rate for the current year will be higher than if the valuation allowance had not increased. This is because less income is being taxed at a higher rate. Therefore, the statement is true.

If a Valuation Allowance Is Increased in the Current Year,the