Deferred Tax Assets & Valuation Allowance

Hi,

As I understood it, a company creates a Valuation Allowance account in the amount from the Deferred Tax Asset, that it expects to not recover based on the probability of insufficient future earnings to reap the full benefits of the Deferred Tax Asset.

My question is, why is it a prerequisite for a company to earn “sufficient” income to reap the full benefits of a deferred tax asset? in other words, why is there a contingency on the company’s earnings?

Just in case anyone was wondering the same thing. I found this slide deck to answer the aforementioned question:

https://www.fdic.gov/news/conferences/atlanta_region/2012-04-12-dta.pdf

A DTA will reduce your future income taxes.

If you don’t have enough revenue, you don’t have future income taxes. You can’t save what you don’t have to pay to begin with.