Question

An American Company just generated a loss of $35,000. They expect to start making an annual profit before tax of $13,000 starting next year. Calculate their tax liability for the next four years if their tax rate is 25% and they plan on using tax-loss carry forward rule.

please show me steps thank you

Answer 1

Loss set off is allowed for up to 80% of taxable income.

Tax liability is:

Particulars	Year 1	Year 2	Year 3	Year 4
Profit for the year	$         13,000	$        13,000	$      13,000	$ 13,000
× 80%	80%	80%	80%	80%
Maximum loss deduction	$         10,400	$        10,400	$      10,400	$ 10,400
Loss from previous year	$         35,000	$        24,600	$      14,200	$    3,800
Less: deduction during year	$       (10,400)	$      (10,400)	$     (10,400)	$ (3,800)
Loss carry over to next year	$         24,600	$        14,200	$        3,800	$          -
Profit for the year	$         13,000	$        13,000	$      13,000	$ 13,000
Less: loss deduction	$       (10,400)	$      (10,400)	$     (10,400)	$ (3,800)
Taxable income	$           2,600	$          2,600	$        2,600	$    9,200
× tax rate	25%	25%	25%	25%
Tax liability	$              650	$             650	$            650	$    2,300

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