The Bookbinder Company has made $150,000 before taxes during each of the last 15

Question

The Bookbinder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2013 the firm incurred a loss of $650,000. The firm will claim a tax credit at the time it files its 2013 income tax return, and it will receive a check from the U.S. Treasury. Show how it calculates this credit, and then indicate the firm’s tax liability for each of the next 5 years. Assume a 40% tax rate on all income to ease the calculations.

Explanation / Answer

A company may carry the net operating loss back two years and receive refund for the income tax paid for those years

on profit of 2011 tax= 150000*40%=60000

2012 tax=150000*40%= 60000

Total of 120000 will be deducted from 650000= 530000

530000 is carry forwarded

Years it will take= 530000/60000=6.3 years

no tax for next 6.3 years

therefore the firms liability for the next 5 years will be 0

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