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
The 2006 NOL is carried forward and used to reduce the 2007
operating income to $12,000 ($47,000
Graves pays a tax of
$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
Carryforward of 2006 loss
2007 Taxable Income
Carryback of 2008 loss to 2007
Carryforward of 2008 loss to 2009
2007 Taxable income
Tax rate on $12,000 of income
2007 Tax paid (refund of carryback)
Graves has the option of electing not to carry the 2008
loss back to 2007 and carrying the $21,000 loss forward to 2009.
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.
the $21,000 operating loss is distributed to each shareholder.
shareholder then takes the appropriate allowable deduction on his/her
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.