Question

Problem 2-13
Loss Carryback and Carryforward

The Bookbinder Company has made $300,000 before taxes during each of the last 15 years, and it expects to make $300,000 a year before taxes in the future. However, in 2016 the firm incurred a loss of $725,000. 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 35% 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 (35%)
Tax refund: Taxes previously paid	$	$

Total check from U.S. Treasury $   

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

Answer 1

Prior years	2014 ($)	2015 ($)
Profit earned	300,000	300,000
Carry back credit	300,000	300,000
Adjusted profit	0	0
Tax previously paid @35%	105,000	105,000
Tax refund: Taxes previously paid	105,000	105,000

By exercising loss carry-back option, a company may carry the net operating loss back two years and get refund of income taxes paid in those years.

So if we carry loss back for Prior Years 2014 and 2015, On profit 2014, we calculate tax of 35% (300,000x35%) = 105,000

On profit 2015, we calculate tax of 35% (300,000x35%) = 105,000

Total 210,000 is deducted from the 2016 loss of 725,000= 515,000

The remaining 515,000 we can carry forward (according to tax rules we can carry forward loss up to 20 years).

Calculation of tax liability for next five years

Prior years	2014 ($)	2015 ($)	2016 ($)	2017 ($)	2018 ($)
Profit earned	300,000	300,000	300,000	300,000	300,000
Carry forward credit	300,000	215,000	0	0	0
Adjusted profit	0	85,000	300,000	300,000	300,000
Tax@35%	0	29,750	105,000	105,000	105,000