Salinger Software was founded in 2011. The company lost money each of its first

Question

Salinger Software was founded in 2011. The company lost money each of its first three years, but was able to turn a profit in 2014. Salinger's operating income (EBIT) for its first four years of operations is reported below.

The company has no debt, so operating income equals earnings before taxes. The corporate tax rate has remained constant at 35%. Assume that the company took full advantage of the carry-back, carry-forward provisions in the Tax Code, and assume that the current provisions were applicable in 2011. How much tax did the company pay in 2014?

Explanation / Answer

SOLUTION:

Calculation of tax to be paid in 2014.

The company can carry all of its losses forward against the 2014 profit of $700,000,000

Note that we can carry forward for 20 years.

First, find the accumulated losses for 2011 to 2013. Which is,

Accumulated losses = (-$50,000,000) + (-$150,000,000) + (-$100,000,000)

Accumulated losses = -$300,000,000

This means it can carry forward $300,000,000 of losses, against $700,000,000 of profits.

Second, calculate the taxable income. Which will be,

Taxable Income = $700,000,000 - $300,000,000

Taxable Income = $400,000,000

Now, find the taxes with tax rate of 35%.

Taxes = $400,000,000 * 0.35

Taxes = $140,000,000

Hence, the answer is a. $140,000,000

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