Question

The bookbinder company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. however, in 2015 the firm incurred a loss of $525,000. the firm will claim a tax credit at the time it files its 2015 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".

Answer 1

A company can carryback losses up to 3 years. This means that the company can use its 525,000 2015 loss to obtain a credit for income taxes paid in the previous 3 years, 2012-2014. The calculation is as follows:

2012 Carryback: 150,000 x .35 = 52,500

2013 Carryback: 150,000 x .35= 52,500

2014 Carryback: 150,000 x .35 = 52,500

The check that Book Binder receives will be 52,500 x 3 = 157,500.

Its tax liability in 2015 will be zero, and its loss eligible for carryforward will be 525,000-450,000=75,000, since it has already carried back $450,000 of its loss (2012-2014 income).

Its liabilities in future years will be:

2016: (150,000-75,000) x .35 = 26,250. We have now exhausted all tax credits possible from the 2015 loss.

2017-20: 150,000 x .35 = 52,500