Question

Does the taxpayer’s effective tax rate increase or decrease when:

1. It creates a valuation allowance against the deferred tax asset for a net operating loss?
2. It releases a valuation allowance against a deferred tax asset for a net operating loss?

Answer 1

a.The tax payer's effective tax rate increses when it creates a valuation allowance against the deferred tax asset for a net operating loss.It is simply beacause the valuation allowances increses the net operating loss.When the net operating loss of a deferred tax asset increases,it will also increses the tax payer's effective tax rate

b.The tax payer's effective tax rate decreses when it releses a valuation allowance against a deferred tax asset for a net operting loss.it is beacuse the relese of valuation allowance decrese the net operting loss.When the net operting loss of a deferred tax asset decreses.,it will decrese the tax payer's effective tax rate.