Question: BRIDGE TO THE PROFESSION

Professional Research: FASB Codification

Kleckner Company started operations in 2010. Although it has grown steadily, the company reported accumulated operating losses of $450,000 in its first four years in business. In the most recent year (2014), Kleckner appears to have turned the corner and reported modest taxable income of $30,000. In addition to a deferred tax asset related to its net operating loss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerated depreciation. Given its past operating results, Kleckner has established a full valuation allowance for its deferred tax assets. However, given its improved performance, Kleckner management wonders whether the company can now reduce or eliminate the valuation allowance. They would like you to conduct some research on the accounting for its valuation allowance.

Instructions: If your school has a subscription to the FASB Codification. Provide Codification references for your responses.

(a) Briefly explain to Kleckner management the importance of future taxable income as it relates to the valuation allowance for deferred tax assets.

(b) What are the sources of income that may be relied upon to remove the need for a valuation allowance?

(c) What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a tax-planning strategy to support reducing its valuation allowance?