Question

Theodore Enterprises had the following pretax income (loss) over its first three years of operations: 2016 $ 500,000 2017 (900,000 ) 2018 1,500,000 For each year there were no deferred income taxes and the tax rate was 30%. In its 2017 tax return, Theodore elected a net operating loss carryback. No valuation account was deemed necessary for the deferred tax asset as of December 31, 2017. What was Theodore's income tax expense for 2018?

Answer 1

Answer:

$450,000

Explanation:

Theodore Enterprises had the following pretax income (loss) over its first three years of operations:

2016 $ 500,000

2017 (900,000 )

2018 1,500,000

For each year there were no deferred income taxes and the tax rate was 30%. In its 2017 tax return, Theodore elected a net operating loss carryback. No valuation account was deemed necessary for the deferred tax asset as of December 31, 2017.

Therefore Theodore's income tax expense for 2018 is 30% x 1,500,000  = $450,000

Loss carry back is when a business elects to net off losses against a previous year's return as opposed to loss carry forward which is the future years' return.

Answer 2

Answer:

$450,000

Explanation:

during 2017, Theodore Enterprises reported a $900,000 loss = $300,000 net carryover, but since they decided to elect a loss carryback, those $300,000 went to reduce the payment of 2016 taxes (that were probably overdue).

That means that the company had no carryover left for 2018 taxes = $1,500,000 x 30% = $450,000

A carryover happens when a company chooses to carry a loss forward, while a carryback happens when the company chooses to reduced previous taxes with the current loss.