In: Accounting
A Company’s management further explained that the tax-exempt interest and excludable dividends could not be used to offset losses generated by nonlife insurance operations of company. Company has earned a substantial amount of its tax-exempt interest and excludable dividends from funds held for future casualty and property claim payments. Company’s management believes that it is appropriate to recognize the tax benefit of the loss carryforward arising in the fiscal year ending November 30, 2011, in its November 30, 2011, financial statements. The company points out that it has elected consolidation for income tax purposes. This will mean that profitable life insurance company operations will offset nonlife insurance company losses. Also, it is expected that future operations of nonlife insurance companies will become profitable and start generating taxable income. Company does not anticipate a problem in the realization of the tax benefit of the operating loss carryforward within the newly enacted 20-year period.
What tax-planning strategies are available to Company for realizing the tax benefit of the operating loss carryforward?
What should Company do if it recognizes the deferred tax asset for the operating loss carryforward and then concludes it is more likely than not that realization of some or all of the deferred tax benefits will not occur?
A company may carry a net operating loss back two years and receive refunds for income taxes paid in those years. The loss is applied to the earlier year first and then to the second year. Any loss remaining after the two-year carryback may be carried forward up to 20 years to offset future taxable income. A company may forgo the loss carryback and use the loss carryforward, offsetting future taxable income for up to 20 years.
Deferred tax asset(DTA) is presented under non current assets.DTA is recognised only if there is future virtual certainty. It means DTA can be realized only when the company reliably estimates sufficient future taxable income. This test for virtual certainty has to be done every year on balance sheet date and if the condition is not fulfilled, such DTAshould be written off.These taxes returned in the form of tax refund,over payment of taxes therefore as a asset to the company