The bookbinder company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. however, in 2013 the firm incurred a loss of $650,000. the firm will claim a tax credit at the time it files its 2013 income tax return, and it will receive a check from the u. s. treasury. show how it calculates this credit, and then indicate the firm’s tax liability for each of the next 5 years. assume a 40% tax rate on all income to ease the calculations.

Through use of a loss carry back, a company may carry the net operating loss back two years and receive refunds for income taxes paid in those years So if we loss carry back for Prior Years 2011 and 2012 On profit 2011 we calculate tax of 40% (150000x40%) = 60000 On profit 2012 we calculate tax of 40% (150000x40%) = 60000 Total 120,000 is deducted from the 2013 loss of 650,000= 530,000 The remaining 530,000 we can carry forward (As per tax rules we can carry forward loss up to 20 years) If we carry forward the loss of 530,000 to redeem completely it will take 6.3years if every year we redeem 60000 If we carry forward the amount we will not pay any tax for next 6.3 years So the Firm's tax liability is zero for next 6.3years So for 2014,15,16,17,18 the Firm's tax liability is zero