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.
Corporate tax law allows for a recovery of taxes paid in prior years before a loss year. The amount can be immediately refunded by offset ting against prior profitable years.
NOL can be elected to carry forward .
A tax loss in any given year can be carried back to offset taxable income.

b. Determine the tax liability for the Garvey Corporation for years one and two.
60,000x25%=15,000
20,000x20%=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.
60,000+20,000= 80,000 loss for previous two years
90,000-80,000=10,000 The remaining would carry forward to the next profitable year.
Yr 1- 60,000-60,000=0 refund of 15,000 for previous paid income taxes
Yr 2 – 20,000-20,000=0 refund of 4,000 for paid income taxes
The income tax refund would be 19,000

d. Determine the required income tax payments for year four.
30,000-10,000=20,000 x 15%=3,000
The 10,000 unused NOL from yr 3 is carry forward. Now the total NOL 90,000 is completely offsetted

e. Determine the income tax liability (refund) realized in year five.
Yr 5 has no tax liability because it is a loss year
The 40,000 loss will carry back to yr 4.
30,000-10,000-20,000=0 therefore the 3,000 refunded in year 3 is refunded in year 5.
f. If the Garvey Corporation believes its business is about to “take