Valuation allowance definition
/What is a Valuation Allowance?
A valuation allowance is a reserve that is used to offset the amount of a deferred tax asset. The amount of the allowance is based on that portion of the tax asset for which it is more likely than not that a tax benefit will not be realized by the reporting entity.
Example of a Valuation Allowance
Spastic Corporation has created $100,000 of deferred tax assets through the diligent generation of losses for the past five years. Based on the company’s poor competitive stance, management believes it is more likely than not that there will be inadequate profits (if any) against which the deferred tax assets can be offset. Accordingly, Spastic recognizes a valuation allowance in the amount of $100,000 that fully offsets the deferred tax assets.