Problem - Corporate net income, also called corporate taxable income, is a corporation's gross income minus any allowable deductions for business losses. Sometimes, however, a corporation's deductions exceed its gross income for a given tax year. This excess amount is called the net operating loss (NOL). Corporations can use the NOL to offset income and taxes in another year through carry backs and carryovers. The IRS permits carry backs and carryovers to give a corporation the full benefit of its loss. An NOL carry back will provide a corporation with a tax credit, and a carryover will reduce or eliminate future tax liabilities.
Assignment: Analyze the tax implications for the following case study. Apply the IRS codes to calculate a corporation's net operating loss based on net income. Support your conclusions with reference to specific IRS codes and regulations.
In 2011, Star 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 $220,000 of operating expenses. Star's 2009 taxable income (all ordinary income) was $75,000, on which it paid taxes of $13,750.
- What is Star's net operating loss for 2011?
- What is the amount of Star's tax refund Star carries back the 2011 net operating loss to 2009?
- Assume that Star expects 2012's taxable income to be $400,000. Ignore the U.S. production activities deduction. What election could Star make to increase the tax benefit (if any)? Assume a 10% discount rate as a measure of the time value of money?