Question

Problem 18-03

The federal corporate income tax rate is 35 percent and firms may carry-back losses for two years and carry-forward losses for 20 years. The carry-back must occur before carry-forward. A corporation breaks even in year 1, earns $27,000 in year 2, but operates at a loss of $87,000 in year 3. It earns $73,000 in year 4, breaks even in year 5, and earns $43,000 in year 6. What are the taxes paid or refunded in each year? Enter your answers as positive values. If the answer is zero, enter "0". Round your answers to the nearest dollar.

Year	1	2	3	4	5	6
Taxes	$	$	$	$	$	$
Tax refund or tax offset	$	$	$	$	$	$
Net taxes paid	$	$	$	$	$	$

Answer 1

A	B	C	D=B-C
Year	Tax @ 35%	Tax Refund or Offset	Net Tax Paid
1	0	0	0
2	9450	9450	0
3	0	0	0
4	4550	0	4550
5	0	0	0
6	15050	0	15050

Year 1:

Income of 0, hence no tax

Year 2:

Income of 27000, tax paid 27000*35%=9450

Year 3:

Loss of 87000, we should carry back 27000 loss to previous year & carry forward 60000 loss to next year.

The carry back 27000 loss will be setoff from year 2 income, hence revised year 2 taxable income would be 0, & we will get the refund of 9450 tax paid

Year 4:

Income of 73000, this should be first setoff from the carried forward loss of 60000, & remaining 13000 profit will be taxable @ 35% i.e. 4550 tax paid

Year 5:

Income of 0, hence no tax

Year 6:

Income of 43000, tax paid 43000 @ 35% i.e. 15050

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