Tax Valuation Allowances: Identifying the Next Releases — and the Next Multi-Billion Dollar Charges
Using SEC filings to identify companies that may face significant future tax-related earnings swings.
A deferred tax asset represents a future tax benefit that a company expects to use to reduce taxes in later years — for example, from net operating losses, tax credits, or expenses recognized for accounting purposes earlier than for tax purposes. Under U.S. GAAP, companies can keep those deferred tax assets on the balance sheet only if management believes it is more likely than not — meaning greater than a 50% probability — that future taxable income will be sufficient to use the tax benefits. If management determines that some or all of those benefits have less than a 50% likelihood of being realized, the company must record a valuation allowance to reduce the deferred tax assets to the realizable amount.
The calculation of the valuation allowance is also very complex and not all assets or liabilities are included. Mattel found out about this the hard way!
The timing of recording and releasing tax valuation allowances involves management judgment because the “more likely than not” analysis relies on assumptions about future profitability. Companies must consider both positive and negative evidence, including recent profitability trends, cumulative losses, projected earnings, the expected timing of reversals of temporary differences, the availability of tax-planning strategies, the geographic mix of future income, and the risk that tax attributes could expire unused. Small differences in those assumptions can lead companies facing similar underlying economics to reach very different conclusions about whether deferred tax assets remain realizable.
Because changes in valuation allowances flow through income tax expense, they can create large non-cash swings in reported earnings. In my past pieces, I discussed several examples of unusually large valuation allowance changes. Some — such as Meta’s and Qualcomm’s — were primarily driven by changes in tax law, including the corporate alternative minimum tax (“CAMT”).
Others — such as Tesla’s — reflected changes in management’s expectations about future profitability and the realizability of deferred tax assets. For Tesla, the release of the tax valuation allowance, prompted by SEC scrutiny, increased income for the last quarter of fiscal 2023 by $5.9 billion. The SEC, in its September 26, 2023, comment letter, questioned whether Tesla’s maintaining a full valuation allowance was appropriate given the “…significant pre-tax income in each of the three years…” presented in the income statement.
According to the PwC accounting guide, ASC 740 requires companies to consider both positive and negative evidence, such as a history of cumulative losses, in setting the valuation allowance:
“All available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed…
…A cumulative loss in recent years is a significant piece of negative evidence that is difficult to overcome.”
ASC 740 does not define the term “recent years”. However, according to Tax Adviser, the analysis often starts from “three-year cumulative pretax book losses or earnings”. This is consistent with the “three years of profits” argument in the SEC comments to Tesla.
Based on my analysis of the SEC filings, improved profitability projections are a common reason for releasing a tax valuation allowance. For example, Lyft released $2.9 billion of its tax valuation allowance in fiscal 2025, citing a sustained U.S. profitability. As disclosed in Lyft’s 2025 10-K:
“For the year ended December 31, 2025, the Company recorded a $2.9 billion benefit from the release of the valuation allowance with respect to our U.S. federal and certain state deferred tax assets. This includes the benefit of approximately $226.8 million related to federal R&D credits attributable to prior years that were recognized in the current period upon completion of the Company’s R&D credit study in tax year 2025. As of December 31, 2025, based on all available positive and negative evidence, having demonstrated sustained U.S. profitability, which is objective and verifiable, and taking into account anticipated future earnings, we have concluded it is more-likely-than-not that we will realize our U.S. federal and state deferred tax assets, with the exception of California R&D credits. We continue to maintain a valuation allowance against these deferred tax assets as they have not met the “more-likely-than-not” realization criterion.”
Lyft noted in its quarterly filing for the period ending September 30, 2025, that it is reasonably possible that it may need to reverse part of its fully reserved valuation allowance, but the timing and the amount are uncertain:
“Based on the Company’s assessment of current and anticipated future earnings, it is reasonably possible that sufficient positive evidence of sustained U.S. profitability may become available in the foreseeable future to reach a conclusion that the U.S. valuation allowance will no longer be needed. The timing and amount of the valuation allowance release could vary based on the level of profitability that the Company is actually able to achieve.”
So, can we use GAAP requirements, historical examples of companies releasing valuation allowances, and the SEC’s position in Tesla’s case to identify companies that, based on their public disclosures, have close to fully reserved valuation allowances but have signaled a possible release of those allowances due to sustained US profitability?
I used Calcbench data to identify companies that fit the following criteria:
Two years of profitability following a history of losses;
Valuation allowance of at least 80% of the Deferred Tax Assets;
Valuation allowance of at least $500 million.
The $500 million valuation allowance criterion is intended primarily to focus on companies in which a potential release could have a material impact on reported earnings. At the same time, these screening criteria should be viewed only as a broad filter, not as a prediction model. Improved profitability is a necessary component of the analysis but not necessarily a sufficient reason for release of the valuation allowance, however. Three years of profitability, by itself, may not constitute sufficient positive evidence under ASC 740 to support the release of a valuation allowance.
In addition, large valuation allowances may persist for reasons that are unrelated to overall company profitability. For example, some companies maintain reserves because certain deferred tax assets may not be realizable under CAMT rules, because state R&D credits are expected to expire unused, or because tax attributes in particular foreign jurisdictions are still not considered more-likely-than-not realizable even when the consolidated company has returned to profitability. As a result, the screen is designed to identify companies that may warrant further analysis rather than companies that are necessarily likely to release valuation allowances in the near term.
After the paywall, I will discuss some of those companies in more detail, breaking down the disclosures to identify cases that, in my view, have a higher likelihood of releasing the tax valuation allowance.
I also discuss companies that sharply increased valuation allowances in 2025 due to changes in tax law, industry conditions, or weakening earnings expectations. The analysis focuses on investor-relevant disclosure signals — tax law changes and industry-wide developments that usually affect multiple companies within the same industry or with similar characteristics.
