Now that Citigroup (NYSE:C) has started to generate a profit again, they may be able to avoid a $10 billion tax hit which some believed they would have to endure.
This is a reference to deferred tax assets, or DTAs, which are losses which can be used to cut taxes on the future income of a company.
At the time the issue was raised, Citigroup had experienced significant losses in its recent history, and looking forward, it was debatable as to whether or not the company had enough clout to generate profits which could be able to use the DTA as a tax tool.
The profits or gains are important because the DTA is used as a tax tool to offset gains. If there are no potential gains, or little chance of gains, the company wouldn’t, or shouldn’t, be allowed to use them.
Now that Citigroup had a strong first quarter, generating $4.4 billion in profits, they have a better argument as to using a DTA, rather than being forced to write down the losses.
While it seems Citigroup has avoided this disaster, it’s not 100 percent sure that is how it will work out, as the sustainability of earnings is still part of the picture, and that is no surety for Citi going forward.
But as I mentioned, the first quarter earnings will probably give them some leeway here, although it is still a cloud over their heads, but not as big of one as there was not too long ago.