Overview

Deciding when to use a net operating loss (NOL) will have a financial impact on a company's taxable income. Carryforward (net operating loss carryover) and carryback (net operating loss carried back to a prior year) are strategies that businesses may use during a tax year when gross income exceeds deductions or a positive taxable income. Consider the scenarios below and choose one.

Scenarios

You are a tax associate working with clients regarding the scenarios below.

1. Carryback Scenario

In the most recent tax year, HyunJin Corporation reported taxable income of $100,000 before any NOL deductions. HyunJin has a $170,000 NOL carryover that originated in 2017 and a $90,000 NOL carryover that originated in 2020. Consider HyunJin's current year's taxable income after the NOL deduction (assuming it elects to forego any NOL carryback). Consider what NOLs HyunJin can carry over to the next tax year.

2. Carryforward Scenario

In the most recent tax year, El Ciudad Corporation reports gross income of $200,000 (including $150,000 of profit from its operations and $50,000 in dividends from less-than-20%-owned domestic corporations) and $230,000 of operating expenses.

Directions

Using the scenarios provided, create memos for each of these clients considering the benefits and drawbacks of carrying forward and carrying back. Additionally, use the Shapiro Library Accounting Resources Guide and research current tax laws to consider how they apply to each scenario. Combine both memos into one document, and then explain and analyze the following rubric criteria for each scenario.

Part OneCarryback

1. Explain the effects of the current carryback tax law as it applies to a company's NOL. Include the following in your response:
   1. Effect on company's income statement
   2. Effect on company's balance sheet
   3. Adjusting entries requirements
2. Analyze potential impacts on companies who no longer qualify to take advantage of the NOL carryback feature. Consider the following in your response:
   1. NOL carryforward affects this year's projected net income
3. Provide carryback recommendations to the company on how the tax law may impact a company's five-year plan. Consider the following in your response:
   1. Impact on a company's five-year plan with no longer having the carryback option of the NOL tax law
   2. Decisions might the company make

Part TwoCarryforward:

1. Explain advantages of the current carryforward tax law in reference to NOLs that could benefit the company. Include the following in your response:
   1. Company's ability to take advantage of carryforward NOLs this year
   2. Potential impact on decisions
2. Analyze the advantages of potential temporary timing differences in book-to-tax based on the effects of the tax law. Consider the following in your response:
   1. NOL carryforward effects on the company's financial statements
   2. Impact on the financial statements
3. Provide carryforward recommendations to the company. Consider the following in your response:
   1. Advise the company on tax planning recommendations
   2. Potential adjustments to the estimated tax payments or the tax liability