Baker Corporation suffers a net operating loss (NOL)of $65,000 in 2013.Baker was incorporated in 2011.Baker had a NOL of $20,000 in 2011 and taxable income of $35,000 in 2012.The corporation expects a taxable income of $200,000 in 2014.What valid alternatives are available to Baker concerning the $50,000 loss?
I.Baker can carryback the loss to 2014 and will receive a refund of $2,250.
II.Baker can elect to carryforward the loss and expect to receive tax savings of $19,500.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Quizplus · Accepted Answer

I. Baker can carryback the NOL to the previous two years (in this case, 2011 and 2012) and receive a refund of taxes paid in those years. Since Baker had taxable income of $35,000 in 2012, the corporation can use the NOL to offset that income and receive a refund of $2,250 ($35,000 x 35% tax rate).

II. Alternatively, Baker can elect to carryforward the NOL to future years (in this case, 2014 and beyond) and use it to offset future taxable income. Based on the $200,000 estimated taxable income in 2014, the corporation could potentially save $19,500 in taxes ($50,000 x 39% tax rate).

Therefore, both options are valid and have different benefits depending on the corporation's current and future financial situations.

Baker Corporation Suffers a Net Operating Loss (NOL)of $65,000 in 2013.Baker