Net Operating Loss Carrybacks and Carryovers. In 2009, Ace Corporation reports g

ID: 2422538 • Letter: N

Question

Net Operating Loss Carrybacks and Carryovers. In 2009, Ace Corporation reports gross income of $200,000 (including $150,000 of profit from its operations and $50,000 in dividends from less-than-20%-owned domestic corporations) and $220,000 of operating expenses. Ace’s 2007 taxable income (all ordinary income) was $75,000, on which it paid taxes of $13,750.

What is Ace’s NOL for 2009?

What is the amount of Ace’s tax refund if Ace carries back the 2009 NOL to 2007?

Assume that Ace expects 2010’s taxable income to be $400,000. Ignore the U.S. production activities deduction. What election could Ace make to increase the tax benefit from its NOL? What is the dollar amount of the expected benefit (if any)? Assume a 10% discount rate as a measure of the time value of money.

Explanation / Answer

Year 2009 : Net Operating Result

Particulars

Amount $

Gross Income

200,000

Less: Dividend

(50,000)

Operating revenue

150,000

Operating Expenses

220,000

Operating Loss for 2009

(70,000)

If your losses exceed your income from all sources for the year, you have a “net operating loss” (NOL for short). You are allowed to apply an NOL to past tax years. This is called carrying a loss back. The carryback period is usually two years, however a three-year carryback period applies if your net operating loss was the result of theft or a casualty.

So Loss of 2009 70,000 can be adjusted to the Income of 2007 is 75,000 and the balance income after net off available for 2007 is $ 5,000

Then Tax Refund will be @18.33% of Tax Charged earlier = 12,831 $

Ace Corporation could elect to relinquish the carryback period entirely and instead carry the loss forward to 2010. If Ace earns taxable income (before any NOL) of $400,000 in 2012, Ace Corporation will save $12,950 (0.185 x 70,000) in 2010 by using the NOL as a carryforward. Therefore, by electing to forego the carryback period, Ace will increase its tax