Question

In: Accounting

In general terms, net operating loss is a loss that results when a company’s expenses exceed...

In general terms, net operating loss is a loss that results when a company’s expenses exceed its income.

Respond to the following in a minimum of 175 words:

  • What are the tax implications of a net operating loss?
  • For how long can an organization carry forward a net operating loss? Explain your reasoning.

Solutions

Expert Solution

Net operating loss is allowed for carry forward so that it can be used in subsequent years to setoff with the incomes of subsequent years.

The reason for carry forward and then set off with future income is that some businesses may be seasonal so such business would generate large income in some year whereas in some years they could incur losses ,so to reduce the huge burden of taxes in the years of profit, the carry forward of losses is allowed.

Net operating losses are allowed to be carried forward until infinite time but in one particular year it can be set off upto 80 percent of income of that particular year.

For example xyz company incurred net operating loss of 5 million dollars in year 1 and then in year 2 they generated operating profit of 6 million dollars.

So in year 2 set off of net operating loss would be 4.8 million dollars (6*80/100)

Hence the taxable income of year 2 would be 1.2 million dollars (6-4.8)

And the remaining net operating loss of 0.20 million dollars would be carried forward till infinite.


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