Deferred Tax Asset Limitations By: Rocky Levkulich, CPA Date: 10/8/09 There has been a substantial increase in net deferred tax assets (DTAs) of banks since 2006 due to rising allowances for loan losses as well as net operating losses.  Recently, bank trade groups have requested the banking agencies to reconsider the limitations on the inclusion of DTAs in regulatory capital.  We will, of course, report on any changes as they occur. In anticipation of any possible movement in this area, we thought this would be a good opportunity to review the treatment of DTAs.  A deferred tax asset or liability is the result of temporary differences between the book values of assets and liabilities and their tax bases.  This is usually due to differences between the timing of the recognition of income or expense in financial statements versus the timing of such recognition in a tax return.  An example of a timing difference is where the provision for loan losses is recorded in one year for financial statement purposes and deducted in a different year for tax purposes when the loan is actually charged off. Regulatory capital standards limit the amount of DTAs that can be included in Tier 1 capital.  Generally, DTAs, the realization of which are dependent upon future taxable income, are limited to the lesser of (1) the amount of DTAs that the bank expects to realize based on one year of projected future taxable income, or (2) 10% of Tier 1 capital.  A bank may exclude the deferred tax effects of unrealized holding gains and losses on available-for-sale debt securities, however, such treatment must be consistently applied.