Answer: deferred tax assets only.

## Explanation Under US GAAP, a valuation allowance is specifically created against **deferred tax assets only**. This is because: 1. **Purpose of Valuation Allowance**: A valuation allowance is established when it is "more likely than not" that some or all of the deferred tax assets will not be realized. This assessment is based on future taxable income expectations. 2. **Deferred Tax Assets vs. Liabilities**: - **Deferred Tax Assets (DTAs)**: Represent future tax benefits (reductions in future tax payments) that arise from temporary differences, tax loss carryforwards, or tax credit carryforwards. Since these are assets that depend on future profitability to be realized, they may require a valuation allowance if realization is uncertain. - **Deferred Tax Liabilities (DTLs)**: Represent future tax obligations that will be paid. These are liabilities that will definitely be settled, so no valuation allowance is needed. 3. **Accounting Treatment**: According to ASC 740 (Income Taxes), companies must assess the realizability of deferred tax assets and reduce them through a valuation allowance if necessary. No similar allowance exists for deferred tax liabilities. 4. **Impact on Financial Statements**: The valuation allowance reduces the carrying amount of deferred tax assets on the balance sheet and increases income tax expense on the income statement when established. **Correct Answer**: A - deferred tax assets only.

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