Question

Loss Carryback and Carryforward

The Bookbinder Company has made $250,000 before taxes during each of the last 15 years, and it expects to make $250,000 a year before taxes in the future. However, in 2016 the firm incurred a loss of $550,000. The firm will claim a tax credit at the time it files its 2016 income tax return, and it will receive a check from the U.S. Treasury. Show how it calculates this credit, and then indicate the firm's tax liability for each of the next 5 years. Assume a 40% tax rate on all income to ease the calculations. Enter your answers as positive values. If an amount is zero, enter "0".

Prior Years	2014	2015
Profit earned	$	$
Carry-back credit	$	$
Adjusted profit	$	$
Tax previously paid (40%)	$	$
Tax refund: Taxes previously paid	$	$

Total check from U.S. Treasury $    

Firm's tax liability
2017:    $    
2018:    $    
2019:    $    
2020:    $    
2021:    $    

Answer 1

Computation of Refund
Prior years	2014	2015
Profit earned	$250,000.00	$250,000.00
Carry back credit	$250,000.00	$250,000.00
Adjusted profit	$0.00	$0.00
Tax Previously paid (40%)	$100,000.00	$100,000.00
Tax Refund: Tax previously paid	$100,000.00	$100,000.00

Total check from U.S. Treasury = $100,000 + $100,000 = $200,000

Compuation of firm's tax liability
Particulars	2017	2018	2019	2020	2021
Profit earned	$250,000.00	$250,000.00	$250,000.00	$250,000.00	$250,000.00
Loss carryforward from previous years	$50,000.00	$0.00	$0.00	$0.00	$0.00
Adjusted Profit	$200,000.00	$250,000.00	$250,000.00	$250,000.00	$250,000.00
Tax liability (40%)	$80,000.00	$100,000.00	$100,000.00	$100,000.00	$100,000.00