1. A taxpayer has generated a net operating loss in the current year and is weig
ID: 2482160 • Letter: 1
Question
1. A taxpayer has generated a net operating loss in the current year and is weighing whether to carryback the NOL or elect to carryforward the NOL. The factors to consider in making this decision include all of the following except:
A) Tax credits available in the carryback years B) Refundable tax credits expected in future years C) Time Value of Money D) Marginal tax rates in the relevant years
2. A taxpayer has low AGI this year, but unusually high itemized deductions. The one itemized deduction that is allowed to increase the NOL is:
A) Casualty loss on personal-use assets B) Medical expenses C) State & Local Income and property taxes D) Home mortgage interest
Explanation / Answer
1. The correct answer is (C) Time Value of Money
In deciding whether to carry back or carry forward the NOL (Net Operating Loss) is a major decision often required to be taken by the tax payers. As per Law, Some of the specified NOL can be carried back in previous 2 years or carried forward in next 20 years. The major factors considered in this are:
Firstly, need to consider whether there is enough income / tax credits available to settle the current year's NOL in the previous years tax credits available or not.
Secondly, Carrying back the NOL may not result in its best utilization, even if the taxpayer had significant income in those years, because the income could have been taxed at lower rates due to capital gain or qualified dividends. If in the preceding years, one had good income available to to settle the NOL of the current year then, one needs to consider is the comparative tax rates used in that year Vs. this year.
Thirdly, taking a decision to carry forward the NOL will be dependent on the expected income in the coming years & one's confidence in achieving the budgeted income so as to go as per the plan & can justify to the tax authorities. Any company once faced a NOL is difficult to justify the expected profits & reach the expected levels is an uncertain situation for the company.
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