In its first year of operations the Babco co. has a net operating loss(NOL) of $

Question

In its first year of operations the Babco co. has a net operating loss(NOL) of $1,600 and a pretax loss of $1,360. The difference is due to a temporary difference that will reverse in the following year when the enacted tax rate is 30%. The tax rate for the current year is 40%.

1. Compute the net tax expense or benefit that Babco would report for the current year. Enter a negative number for expense and a positive number for a benefit.

2. What if Babco's pretax loss was $1,600 and its NOL was $1,360 (i.e. pretax < taxable). Compute the net tax benefit or expense.

Explanation / Answer

Net operating loss occours whe companys tax deducted is greater than the taxable income resulting in negative incometax

This can be used to recover past tax payments or reduce future tax.

Since the operating loss is 1600, there will be no income tax for this year, the depretiation is deducted from ooerating liss to arrive at pretax loss, so the depretiation is 1600 - 1360 = 240.

Tax benifit carryforwarded is 0.4×1600 = 640.

If Nol was 1360 tax benigit is 0.4× 1360 = 544, NOL csn be carryfowarded 20 years forward yo recover tax as deferred tax assets

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