What factors determine whether a deferred tax asset for tax loss carryforwards can be recognized?

• A. Always recognized fully.
• B. Expectations of future taxable income and jurisdiction rules.
• C. Never recognized.
• D. Recognized only for tax credits.

Answer: (B)

Deferred tax assets from tax loss carryforwards are not guaranteed to be realized. They are recognized only to the extent that it is probable that future taxable profits will be available to offset those losses, and subject to the specific rules of the tax jurisdiction (such as how long losses can be carried forward and any limitations on use). If the business expects to generate enough future taxable income and the tax laws allow the offset, a deferred tax asset is recognized; if not, it is not recognized, or it is recognized only to the extent of probable profits (often adjusted with a valuation allowance). This is why the option describing dependence on expected future taxable income and jurisdiction rules is the best answer. The other options misstate the treatment: it isn’t always fully recognized, it isn’t never recognized, and recognition for tax loss carryforwards isn’t limited to tax credits.