Chapter 7 - 17. The Graves Corporation was incorporated in...

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17. The Graves Corporation was incorporated in 2006 and incurred a net operating loss of $35,000. The company’s operating income in 2007 was $47,000. Because of a downturn in the local economy, the company suffers a net operating loss of $21,000 in 2008. What is the treatment of the 2008 loss? A corporation is a taxable entity that is responsible for the payment of tax on its income. Therefore, it is allowed a deduction for a net operating loss. The 2006 NOL is carried forward and used to reduce the 2007 operating income to $12,000 ($47,000 - $35,000). Graves pays a tax of $1,800 (15% x $12,000) on the income in 2007. The 2008 loss is carried back to 2007 and $12,000 of the $21,000 loss is used to reduce the 2007 income to zero. This results in a refund of the $1,800 of tax paid in 2007. The remaining $9,000 of loss is carried forward to 2009 and used to reduce income. 2006 2007 2008_ Operating income $ (35,000) $ 47,000 $ (21,000) Carryforward of 2006 loss (35,000 ) 2007 Taxable Income $ 12,000 Carryback of 2008 loss to 2007 (12,000 ) 12,000 Carryforward of 2008 loss to 2009 $ (9,000 ) 2007 Taxable income $ 12,000 Tax rate on $12,000 of income x 15 % 2007 Tax paid (refund of carryback) $ 1,800 Instructor's Note: Graves has the option of electing not to carry the 2008 loss back to 2007 and carrying the $21,000 loss forward to 2009. Graves should make the election if it feels that its marginal tax rate will increase and the net present value of the tax savings of carrying the loss forward exceed carrying back the current year's loss. How would your answer change if Graves were an S corporation? An S corporation is a conduit entity that does not pay tax on its income. The shareholders of Graves are taxed on any income and also receive their proportionate share of any losses generated by Graves. For 2008, the $21,000 operating loss is distributed to each shareholder. The shareholder then takes the appropriate allowable deduction on his/her return. Because the income and loss is passed through to the individual shareholders each year, S corporations do not have net operating loss carryforwards or carrybacks. 7-11
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7-12 Chapter 7: Losses - Deductions and Limitations 23. Wayne owns 30% of Label Maker Corporation. Label Maker is organized as an S corporation. During 2007, Label Maker has a loss of $160,000. At the beginning of 2007, Wayne's at risk amount in Label Maker is $30,000. a. Assuming that Wayne's investment in Label Maker is not a passive activity, what is his deductible loss in 2007? As an S corporation, the income and losses are passed through to its shareholders for taxation. In 2007, Wayne's share of the loss is $48,000 ($160,000 x 30%). Wayne cannot deduct any loss in excess of his at-risk amount in Label Maker. Therefore, Wayne's 2007 loss deduction is limited to $30,000 (reducing his at-risk amount to zero). The remaining $18,000 of his loss is suspended until his at-risk amount increases. b. In 2008, Label Maker has a taxable income of $50,000.
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This note was uploaded on 04/18/2008 for the course ACCT 3013 taught by Professor Murphy during the Spring '08 term at Oklahoma State.

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Chapter 7 - 17. The Graves Corporation was incorporated in...

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