Explain how a company may utilize a net capital loss for tax purposes. After this is...

Explain how a company may utilize a net capital loss for tax purposes.

After this is explained, give an example you’ve seen or read.

Provide your reference.

Expert Solution

A company may utilize a net capital loss to reduce its future years profits with that loss. If a company make a loss in any financial year then that loss can be carry forward by that company in their books of accounts and whenever company makes a profit in any subsequent year then that carried forwarded loss can be adjusted against that profit and accordingly tax liability can be reduced for that profitable year.

For example let suppose a company make a loss of $750000 in year 2017, and makes a profit of $300000 for next three years in each year. Now company would carry forward its loss and their tax liability in the next three years will be as follows (Assume tax rate is 35%)-

2018 - 300000*35% = 105000 - 105000 = 0

2019 - 300000*35% = 105000 - 105000 = 0

2020 - 300000*35% = 105000 - 52500 = 52500

Notes

Tax on loss = 750000*35% = 262500

Reference - https://www.irs.gov/publications/p536#en_US_2018_publink1000177389

jeff jeffy answered 4 months ago

Wynn Farms reported a net operating loss of $132,000 for financial reporting and tax purposes in...

Wynn Farms reported a net operating loss of $132,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows: Taxable Income Tax Rates Income Taxes Paid 2017 $ 68,000 25 % $ 17,000 2018 78,000 25 19,500 2019 112,000 25 28,000 2020 68,000 40 27,200 Prepare the journal entry to recognize the income tax benefit of the net...

Wynn Farms reported a net operating loss of $144,000 for financial reporting and tax purposes in...

Wynn Farms reported a net operating loss of $144,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows: Taxable Income Tax Rates Income Taxes Paid 2017 $ 71,000 20 % $ 14,200 2018 81,000 20 16,200 2019 124,000 25 31,000 2020 71,000 40 28,400 Required: 1. Prepare the journal entry to recognize the income tax benefit of...

Wynn Farms reported a net operating loss of $160,000 for financial reporting and tax purposes in...

Wynn Farms reported a net operating loss of $160,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows: Taxable Income Tax Rates Income Taxes Paid 2017 $ 60,000 15 % $ 9,000 2018 70,000 15 10,500 2019 80,000 25 20,000 2020 60,000 30 18,000 Required: 1. NOL carrybacks are not allowed for most companies, except for property...

Wynn Farms reported a net operating loss of $172,000 for financial reporting and tax purposes in...

Wynn Farms reported a net operating loss of $172,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows: Taxable Income Tax Rates Income Taxes Paid 2017 $ 78,000 20 % $ 15,600 2018 88,000 20 17,600 2019 152,000 25 38,000 2020 78,000 35 27,300 Required: 1. Prepare the journal entry to recognize the income tax benefit of...

Wynn Sheet Metal reported a net operating loss of $126,000 for financial reporting and tax purposes...

Wynn Sheet Metal reported a net operating loss of $126,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 30%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows: Taxable Income Tax Rates Income Taxes Paid 2014 $ 73,000 20 % $ 14,600 2015 83,000 20 16,600 2016 93,000 30 27,900 2017 73,000 40 29,200 Required: 1. Prepare the journal entry to recognize the income tax benefit...

In September 2008, the IRS changed tax laws to allow banks to utilize the tax loss...

In September 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield up to 100% of their future income from taxes (prior law restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquired Covia Bank and with it acquired $88 billion in tax loss carryforwards. If Fargo Bank was expected to generate taxable income of $12 billion per year in the future, and its tax rate...

A corporation has non-capital loss carry forwards and net capital loss carry forwards. How does management...

A corporation has non-capital loss carry forwards and net capital loss carry forwards. How does management decide which of these carry forwards should be deducted first? (NEED ANSWER IN DETAIL)

There are four ways tax consequences may affect the after-tax net proceeds received from the sale...

There are four ways tax consequences may affect the after-tax net proceeds received from the sale of an asset. Describe the four ways and the tax impact in paragraph and examples in detail.

Ayayai Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes....

Ayayai Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.) Year Pretax Income (Loss) Tax Rate 2015 123,000 34% 2016 86,000 34% 2017 (278,000) 38% 2018 237,000 38% Prepare the journal entries for the years 2015–2018 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of...

Tamarisk Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes....

Tamarisk Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. Year Pretax Income (Loss) Tax Rate 2018 $128,000 17 % 2019 118,000 17 % 2020 (290,000) 19 % 2021 306,000 19 % The tax rates listed were all enacted by the beginning of 2018. a) Prepare the journal entries for the years 2018–2021 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryforward, assuming that...

Question