Question

If KG corp has a net operating loss carryforward of 78.3 million, and 75 million in taxable income, what is their income tax payable? Tax rate is 40%

Answer 1

Answer: Income tax payable = $6m

Explanation:

Net operating loss carry forward = $78.3m

Taxable income = $75m

Operating loss can be carried forward indefinitely until the loss is fully recovered but are limited to 80% of the taxable income in any one tax period. The carryover limit of 80% of $75m is $60m. The full loss from the first year can be carried forward on the balance sheet to the second year as a deferred tax asset. The loss, limited to 80% of income in the second year, can then be used in the second year as an expense on the income statement. It lowers net income, and therefore the taxable income, for the second year to $15 million ($75 million - $60 million). A $18.3 deferred tax asset will remain on the balance sheet to be carried into the third year.

Tax payable = $15m x 40% = $6m