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 $750,000. 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 35% tax rate on all income to ease the calculations. Prior Years 2008 2009 Profit earned $ $ Carry-back credit $ $ Adjusted profit $ $ Tax previously paid (35%) $ $ Tax refund: Taxes previously paid $ $ Total check from U.S. Treasury $ Firm's tax liability 2011: $ 2012: $ 2013: $ 2014: $ 2015: $

Explanation / Answer

We Can carry Loss backwards by a Maximum of two years.

By carrying backwards for 2008 & 2009 we make profit for those years zero and claim tax refund.

Loss after carry bakward = 750,000 - 2 * 150,00 = 450,000

To recover this remaining loss we claim tax credit for the next three years.

After three years we have to pay the normal taxes since we have claimed tax credit for all the loss.

Prior Years 2008 2009 Profit earned $ 150,000 $ 150,000 Carry-back credit $ 150,000
$ 150,000 Adjusted profit $ 0 $ 0 Tax previously paid (35%) $ 52,500 $ 52,500 Tax refund: Taxes previously paid $ 52,500 $ 52,500

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