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 2010 the firm incurred a loss of $500,000. The firm will claim a tax credit at the time it files its 2010 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.


Prior Years 2008 2009
Profit earned $150000 $150000
Carry-back credit $150000 $150000
Adjusted profit $ 0 $ 0
Tax previously paid (40%) $ 60000 $ 60000
Tax refund: Taxes previously paid $ 60000 $ 60000

Total check from U.S. Treasury $ 120000


Firm's tax liability
2011: $
2012: $
2013: $
2014: $
2015: $

Explanation / Answer

Loss carries back

Through use of a loss carry back a company may carry the net operating loss back two years and receive refunds for income taxes paid in those years

So we loss carry back for Prior Years 2008 and 2009

On profit 2008 we calculate tax of 40% (150000x40%) = 60000

On profit 2009 we calculate tax of 40% (150000x40%) = 60000

Total 120000 is deducted from the 2010 loss of 500000= 380000

The remaining 380000 we can carry forward (As per tax rules we can carry forward loss up to 20 years)

If we carry forward the loss of 380000 to redeem completely it will take 6.3years if every year we redeem 60000

If we carry forward the amount we will not pay any tax for next 6.3 years

So the Firm's tax liability is zero for next 6.3years

So for 2011,12,13,14 the Firm's tax liability is zero

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