6) (5 pts per source, or 20 pts) Company M is in the biotechnology industry and...

 

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6) (5 pts per source, or 20 pts) Company M is in the biotechnology industry and has been developing drug candidates for 10 years, incurring losses throughout that period. In 2020, it obtained approval for its first drug from the FDA and other international regulators, and successfully launched the product. The Company earned significant profits throughout 2020 and 2021, utilizing all of its previous loss and credit carryforwards. At the end of 2022, the Company will have the following deferred tax assets and liabilities: DTA Capitalized r&d Inventory reserves DTL Depreciation 2,000 (amortized for tax over 5 years) 1,000 (all will reverse within one year) (1,500) (fully depreciated for tax, 5 year book life) The Company has 3 new drugs in the FDA pipeline and optimistic that it can obtain regulatory approval in 2024. As such it is increasing its product development spending substantially in 2023 such that it projections of book profits are approximately break even. The Company's existing drug continues to sell but market demand is decreasing rapidly. Finally, because the Company is relatively new to commercial operations, it does not have a reliable forecast beyond one year, or 2023. Please evaluate whether or not the Company should establish a valuation allowance against its deferred tax assets, and if so how much. 6) (5 pts per source, or 20 pts) Company M is in the biotechnology industry and has been developing drug candidates for 10 years, incurring losses throughout that period. In 2020, it obtained approval for its first drug from the FDA and other international regulators, and successfully launched the product. The Company earned significant profits throughout 2020 and 2021, utilizing all of its previous loss and credit carryforwards. At the end of 2022, the Company will have the following deferred tax assets and liabilities: DTA Capitalized r&d Inventory reserves DTL Depreciation 2,000 (amortized for tax over 5 years) 1,000 (all will reverse within one year) (1,500) (fully depreciated for tax, 5 year book life) The Company has 3 new drugs in the FDA pipeline and optimistic that it can obtain regulatory approval in 2024. As such it is increasing its product development spending substantially in 2023 such that it projections of book profits are approximately break even. The Company's existing drug continues to sell but market demand is decreasing rapidly. Finally, because the Company is relatively new to commercial operations, it does not have a reliable forecast beyond one year, or 2023. Please evaluate whether or not the Company should establish a valuation allowance against its deferred tax assets, and if so how much.