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Hello,
This question is in reference to tramont co (question 5, Kaplan kit)Please I’ll like to know how to deal with tax allowable depreciation in the years in which a loss arose and losses can be carried forward against future profit
I usually add tax allowable depreciation to my cashflow after I multiply by the tax rate, to give a net tax payment. I know there is another method of deducting tax allowable depreciation before computing tax and then adding it back after tax. I tried the first method on this question but I didn’t get the same net cashflow. I’ll like to know if the method I used cannot be applied to this type of scenario.
Please I need help desperately!!
I do not have the Kaplan Kit (only the BPP Kit) and so I cannot comment on this specific question.
However, capital allowances only save tax in the current year if there are sufficient profits to cover the allowances. In Paper FM (was F9) we always assume that the company is already making sufficient profits elsewhere and is already paying tax. Therefore, even if the profits in one year from the new project are less than the capital allowances for the project in that year, they will still save tax because the existing taxable profits of the company will be reduced.
However, in AFM the project is often in another country and therefore tax is payable in the other country just on the taxable profits in that country. If the capital allowances are greater than the profits then there is a tax loss. Therefore no tax is payable in that year and the loss is carried forward to reduce the tax profit in the following year and therefore save tax in the following year (as per normal tax rules from Paper TX (was F6)).
I do explain this in my free lectures because it is a common problem in Paper AFM.
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