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Net Operating Loss Rules

In: Business and Management

Submitted By tiffany1432
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Unit 5 Assignment: Net Operating Loss Rules The Garvey Corporation, a C corporation, during its first 5 years of operation, reported the following taxable incomes (losses): Year | Taxable Income * | 1 | $60,000 | 2 | 20,000 | 3 | (90,000) | 4 | 30,000 | 5 | (40,000) | a. Explain the net operating loss provisions of the tax code as they would relate to the Garvey Corporation. Tax law allows that the amount can be immediately refunded by offsetting against previous profitable years. NOL can be elected to carry forward and a tax loss in nay given year can be carried back to offset taxable income. b. Determine the tax liability for the Garvey Corporation for years 1 and 2 (using the tax rates given above).
60,000 x 25% = 15,000
20,000 x 20% = 4,000 c. Determine the income tax refund that Garvey Corporation would realize in year 3, assuming the corporation elected to use the carryback provision for its net operating loss.
60,000 + 20,000 = 80,000 Loss from previous 2 years
90,000 – 80,000 = 10,000 remaining carry forward
Year 1: 60,000 – 60,000 = No refund of 15,000
Year 2: 20,000 – 20,000 = No refund of 4,000 Income Tax Refund = 19,000 d. Determine the required income tax payments for year 4.
30,000 – 10,000 = 20,000 x 15% = 3,000
Remaining 10,000 used to offset and total NOL is now gone e. Determine the income tax liability (refund) realized in year 5.
Year 5 – no tax liability because it’s a loss year
40,000 loss to carry back to Year 4
30,000 – 10,000 – 20,000 = 0, therefore the 3,000 refunded in Year 3 is refunded in Year 5 f. If the Garvey Corporation believes its business is about to “take off” and that future incomes will exceed all previous levels, resulting in higher tax rates, would you advise Garvey Corporation to forgo the carryback provision for its year 5 net operating loss? Why, or why not?
Yes…...

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