Net Operating Loss Rules Essay

388 words - 2 pages

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 ...view middle of the document...


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 because Year 5 still have a 20,000 carryback. There are no more refunds that can be gained from the past taxable years. Perhaps Garvey Corporation should consider the use of carrying forward instead of carryback as they are anticipating higher income and therefore higher tax responsibilities.

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