Question

MWC Corp. is currently in the sixth year of its existence (2016). In 2011–2015, it reported the following income and (losses) (before net operating loss carryovers or carrybacks). 2011: $ (68,000 ) 2012: (11,250 ) 2013: 57,250 2014: 147,500 2015: (13,500 ) 2016: 495,000

a. Assuming the original facts and that MWC elects to not carry back NOLs, what was MWC’s 2014 taxable income?

b. If MWC does not elect to forgo any NOL carrybacks, what is its 2016 taxable income after the NOL deduction?

c. MWC always elects to forgo NOL carrybacks. What is its 2016 taxable income after the NOL deduction?

c-2. What is its 2016 book-tax difference associated with its NOL? Is it favorable or unfavorable? Is it permanent or temporary?

    

Answer 1

a) MWC’s 2014 taxable income was $125,500 which is calculated as follows:-

Total loss carryover for the year 2011 and 2012 = $68,000+$11,250 = $79,250

NOL carryforward deducted from 2013 year income = $57,250

NOL carryover to be deducted in 2014 = $79,250 - $57,250 = $22,000

Taxable Income for 2014 = $147,500 - $22,000 = $125,500

b) Taxable income in 2016 is $495,000 because loss of $13,500 for the year 2015 is used up when it is carried back to year 2014. So there is no NOL carryover to 2016.

c) If MWC always elects to forgo NOL carrybacks then its 2016 taxable income will be $481,500 after adjusting NOL Carryover from year 2015 of $13,500 (i.e. $495,000 - $13,500 = $481,500).

c-2) The NOL carryover to 2016 creates a $13,500 temporary favourable book-tax difference.