NOL/DTA Question
From my understanding, if a company has $100 in DTAs from the year before and then the following incurred a tax of $50, the following journal entry would be made:
Credit DTA 40 (.8*50)
Credit Cash of 10
Debit Retained Earnings of 50
While this makes sense, my question is what use is the DTA if the retained earning still goes down by $50? Isn't the whole point of NOLs to lessen tax burdens in the future? I guess less actual cash is leaving but if your RE is going down by the same amount aren't u still "losing" $50? Can someone explain thank you.
The DTA doesn't directly impact retained earnings in the current period because the company already benefitted from the DTA when the NOL was created (in the past). The reduction in retained earnings reflects the tax expense of $50, regardless of how much was paid in cash. The benefit of the DTA is in preserving cash.
My understanding is retained earnings decrease by $50 due to the tax expense. But without the DTA, you would also have to pay $50 in cash, whereas now you only pay $10. The benefit of the DTA is in improving your cash flow rather than preventing a reduction in retained earnings. The CFS should reflect this as a decrease to DTA increases cash flow.
Will let others opine here
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