Lesson 8 of 11
Tax the accounts owe later
Tesla released $6.54 billion of valuation allowance in 2023. Net income of $14,997 million exceeded pre-tax income of $9,973 million, and no cash moved.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Deferred tax exists because the accounts and the tax return recognise the same items in different years.
- A temporary difference reverses eventually and creates deferred tax. A permanent difference never reverses and does not.
- A valuation allowance is a judgement about whether a tax asset will ever be used, and changing it can move net income by billions with no cash effect.
A company keeps two sets of numbers for the same year: one for its shareholders under accounting rules, and one for the tax authority under tax rules. They do not agree, and deferred tax is the accounting for the gap.
Most of it is dull. One part of it is not, and it can make net income larger than pre-tax income.
Tesla, fiscal 2023
- Income before income taxes$9,973m
- Benefit from income taxes+$5,001m
- Net income= $14,974m
The waterfall adds to $14,974 million because those two filed figures do. Tesla reported net income attributable to common stockholders of $14,997 million for fiscal 2023, which differs by the amount attributable to noncontrolling interests, a separate line on the same statement.
Temporary against permanent
A temporary difference that will produce a future deduction is a deferred tax asset. One that will produce a future charge is a deferred tax liability. Accelerated tax depreciation is the classic liability: the deduction was taken early, so the tax will be paid later.
The valuation allowance
A deferred tax asset is only worth something if there will be taxable profit to use it against. When that is doubtful, the asset is reduced by a valuation allowance, and the reduction goes through the tax line.
Tesla's fiscal 2023 10-K, filed on 29 January 2024, reports gross deferred tax assets of $10,774 million at 31 December 2023 against $9,533 million a year earlier, with the valuation allowance falling from $7,349 million (Tesla, Inc. FY2023 10-K, accession 0001628280-24-002390) to $892 million (Tesla, Inc. FY2023 10-K, accession 0001628280-24-002390). Net deferred tax assets rose from $2,184 million to $9,882 million.
The note says the company released $6.54 billion (Tesla, Inc. FY2023 10-K, accession 0001628280-24-002390) of its valuation allowance on US federal and state deferred tax assets, having concluded it was more likely than not that they would be realised, and that a full allowance remains against its California deferred tax assets.
Reading the rate reconciliation
Every 10-K carries a table bridging the statutory rate to the effective one, and it is the fastest way to see what happened.
Tesla's shows tax at the federal statutory rate of $2,094 million, then the adjustments. The largest by far is the change in valuation allowance at negative $5,962 million. Foreign income rate differential is negative $816 million, US tax credits negative $593 million, and the global intangible low-taxed income inclusion positive $670 million. The lines total to a benefit of $5,001 million.
One judgement about future profitability is larger than every other line in the table combined, and it moved no money.
What to take from it
A tax line that is a benefit, or an effective rate far from the statutory one, is a prompt to open the reconciliation rather than a finding.
The three questions worth asking are whether the movement is temporary or permanent, whether it is cash or accounting, and whether it is one-off. A valuation allowance release is permanent in effect, entirely non-cash, and happens once. A recurring low rate from foreign earnings is a different animal altogether.
Check yourself
A non-deductible fine reduces accounting profit. What deferred tax does it create?
- A deferred tax asset
- None. It is a permanent difference that never reverses
- A deferred tax liability
Show the answer
Answer: B.
Deferred tax exists for differences that reverse in a later year. A permanent difference changes the effective rate and creates no balance sheet item.What is a valuation allowance?
- A reserve of cash held against future tax
- A reduction of a deferred tax asset for the portion not expected to be realised
- The tax paid in advance
Show the answer
Answer: B.
It is a judgement about whether there will be future taxable profit to use the asset against. Changing that judgement moves reported profit with no cash effect.Tesla's fiscal 2023 net income exceeded its pre-tax income. How?
- Revenue was restated upward
- The tax line was a benefit of $5,001 million, driven by a $5,962 million valuation allowance change
- Foreign earnings were excluded from pre-tax income
Show the answer
Answer: B.
Releasing a valuation allowance recognises deferred tax assets that had been fully reserved. The credit runs through the tax line and no money moves.Sources
- Tesla, Inc., FY2023 Form 10-K, filed 29 January 2024, accession 0001628280-24-002390, income taxes note, for income before income taxes, the benefit from income taxes, the rate reconciliation lines, gross and net deferred tax assets and the valuation allowance at 31 December 2023 and 2022, and the statement that $6.54 billion of valuation allowance was released.
- ASC 740, Income Taxes, on temporary differences, deferred tax assets and liabilities, and the valuation allowance.
What this leaves out
- Every figure here is history, read from the filing named. Nothing is a statement about Tesla today and nothing is a view on any security.
- The waterfall uses income before income taxes and the benefit from income taxes as filed. Net income attributable to common stockholders differs by the amount attributable to noncontrolling interests.
- The temporary and permanent table is illustrative and general. It is not drawn from any company's tax note.
- Tax rules change frequently, and a reconciliation is specific to the law in force for that fiscal year in that jurisdiction.