Good day tutor,
What happens when second year taxable profits are unable to fully absorb previous year tax losses?
Will the following workings be correct?
Taxable (losses)/ profits:
Yr 1: (40,000)
Yr 2: 10,000
Yr 3: 40,000
On NPV 'table':
Year 2 treatment of taxable profits:
Taxable profits $10,000
Tax loss carried forward $(40,000)
= $0
Less taxation ($0)
Add back tax loss carried forward $10,000********
Net cash flow = $10,000
*********QUESTION : Do we add back $10,000 or $40,000? **************
Year 3 treatment of taxable profits:
Taxable profit $40,000
Tax loss carried forward ($30,000)
= $10,000
Less taxation ($XX)
Add back tax loss carried forward $30,000
Net cash flow = $XX
Apologies for the messy workings.
Thanks in advance :)
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Losses
8y ago#1When there are tax losses, it is better to show the tax workings separately, and then just have the final tax flow in the cash flow table for NPV.
So the tax workings would be:
Year 1: 0 tax - loss of 40,000 carried forward
Year 2: 0 tax - loss of 30,000 carried forward
Year 3: If tax is (say) 30%, then tax payable of (40,000 - 30,000) x 30% = 3,000
Then the table of cash flows becomes:
Year 1: outflow (40,000); tax 0; so net cash flow (40,000)
Year 2: inflow 10,000; tax 0; so net cash flow 10,000
Year 3: inflow 40,000; tax (3,000); so net cash flow 37,000
Okay I'll show the tax workings separately then, thanks for the valuable tip :)
8y ago#3You are welcome :-)
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