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Garvey Nol

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Assignment 1 | Net Operating Loss Rules Assignment
The Garvey Corporation, a C corporation, during its first five years of operation, reported the following taxable incomes (losses): Year | Taxable Income | Effective Tax Rate | | | | 1 | $ 60,000 | 25 % | 2 | 20,000 | 20 | 3 | (90,000) | - | 4 | 30,000 | 15 | 5 | (40,000) | 18 | | | |

Required: a. Explain the net operating loss provisions of the tax code as they would relate to the Garvey Corporation.
Garvey must pay the taxes in Years 1& 2 as they come due. In year three, Garvey can carry back the $90,000 net operating loss first to year 1 for the amount of $60,000 and then to year 2 for the amount of $20,000. They can then carry the remaining $10,000 forward to future years up to 20 years. b. Determine the tax liability for the Garvey Corporation for years one and two.
Year 1: $60,000 * 25% = $15,000
Year 2: $20,000 * 20% = $4,000

c. Determine the income tax refund that Garvey Corporation would realize in year three, assuming the corporation elected to use the carryback provision for its net operating loss.

d. Determine the required income tax payments for year four.

e. Determine the income tax liability (refund) realized in year five.
There is no tax liability because of the loss year, but a refund can be realized if part of the $40,000 loss is carried back to year 4. The refund would the tax payment of $3,000 from the previous year. The remaining $20,000 can be carried forward for up to 20 years.
f. If the Garvey Corporation believes its business is about to “take off” and that future incomes will exceed all previous levels, resulting in higher tax rates, would you advise Garvey Corporation to forgo the carryback provision for its year five net operating loss? Why or why not?
There is a remaining $20,000 could be used against future gains for

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