# Changes in DTA/DTL when tax rate changes

This is an excerpt from Schweser Practice Exam Vol 1, Exam 3 Afternoon Session Q60.

A company had DTA of \$1,000 & DTL of \$5,000 last year and tax rate of 50%. There is a news that tax rate will decline to 40%. What will be changes in DTA, DTL and income tax expense ?

The solution stated : DTA will be reduced by \$200 {\$1,000 x [(40%-50%)/50%]= - \$200} and DTL will be reduced by \$1,000{\$5,000 x [(40%-50%)/50%]= - \$1,000)}. Hence, income tax expense will be reduced by \$800.

My question : Why the reduction in DTA is not \$100 [\$1,000 x (40%-50%)] and the reduction in DTL is not \$500 [\$5,000 x (40%-50%)] ? so that the income tax expense is reduced by \$400 (\$500 - \$100) ?

Anyone can help me ? Thanks in advance !

Your original DTA was 1000\$ at 50% tax rate.

So net asset delivering the DTA = 1000/0.5

Now your rate is changing to 40%

so 1000/0.5 *0.4 is going to be the new DTA.

Change in DTA = 1000/0.5 * 0.4 - 1000

or 1000*(0.4-0.5)/0.5 by combining like terms and simplifying as below:

1000* [0.4/0.5 - 1] = 1000 * [0.4-0.5]/0.5

cpk123,

Thank you very much !