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Unformatted text preview: ause the asset was sold for more than its initial purchase price, there is a capital gain of $4,000 ($40,000 sale price $36,000 initial purchase price). The corporation’s taxable income will total $504,000 ($500,000 ordinary income plus $4,000 capital gain). Because this total is above $335,000, the capital gain will be taxed at the 34% rate (see Table 1.4), resulting in a tax of $1,360 (0.34 $4,000). Tax Loss Carrybacks and Carryforwards tax loss carryback/carryforward A tax benefit that allows corporations experiencing operating losses to carry tax losses back up to 2 years and forward for as many as 20 years. WW W Corporations that are experiencing operating losses may obtain tax relief by using a tax loss carryback/carryforward. The tax laws allow corporations to carry tax losses back up to 2 years and forward for as many as 20 years. This feature is especially attractive for firms in cyclic businesses such as durable goods manufacturing and construction. It effectively allows them to average out their taxes over the good and bad years. The law requires the net amount of losses to first be carried back, applying them to the earliest year allowable, and progressively moving forward until the loss has been fully recovered or the carryforward period has passed. Because tax losses can be carried back and applied to previous pretax earnings as soon as they are realized, the firm can apply for an immediate tax refund on its carrybacks. A carryforward, if any, can be used to reduce future income, thereby reducing future tax payments. See the book’s Web site at for an example of how tax loss carrybacks/carryforwards work. Review Questions 1–26 Describe the tax treatment of ordinary income and that of capital gains. What is the difference between the average tax rate and the marginal tax rate? 1–27 Why might the intercorporate dividend exclusion make corporate stock investments by one corporation in another more attractive than bond investments? 1–28 What be...
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This document was uploaded on 01/19/2014.

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