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Puritan Corp.reported the following pretax accounting income and taxable income for its first three years of operations:
Puritan's tax rate is 40% for all years.Puritan elected a loss carryback.
As of December 31,2016.Puritan was certain that it would recover the full tax benefit of the
NOL that remained after the operating loss carryback.
-What would Puritan report as net income for 2017?

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Puritan Corp.reported the following pretax accounting income and taxable income for its first three years of operations:
  Puritan's tax rate is 40% for all years.Puritan elected a loss carryback.
As of December 31,2016.Puritan was certain that it would recover the full tax benefit of the
NOL that remained after the operating loss carryback.
-What would Puritan report as net income for 2017?

Quizplus · Accepted Answer

Puritan elected a loss carryback, which means it applied the NOL to the prior two years and received a tax refund. Therefore, Puritan's taxable income for all three years will be the same as its pre-tax accounting income. 
- Year 1: $200,000
- Year 2: $300,000
- Year 3: ($150,000) NOL
After applying the loss carryback, Year 1 and Year 2 taxable income are zero, and the remaining NOL will be carried forward to Year 4. 
Therefore, for Year 3, Puritan's taxable income is negative $150,000, and its tax refund will be $60,000. 
Pre-tax accounting income for Year 3 is $270,000 ($120,000 + $300,000 - $150,000). 
Adding the tax refund of $60,000 to Year 3's pre-tax accounting income of $270,000, we get Puritan's net income for 2017 of $330,000. 
However, the question asks for Puritan's net income for 2017, which means we need to calculate the net income after carrying the remaining NOL forward. 
Next, we need to calculate the taxable income for Year 4 based on the carried forward NOL. If Puritan applies the entire $150,000 NOL, its taxable income will be zero. Therefore, its pre-tax accounting income for Year 4 will be $300,000. 
Since the tax rate is 40%, Puritan's tax liability for Year 4 will be zero. 
Therefore, Puritan's net income for 2017 (Year 4) will be $300,000 ($300,000 pre-tax accounting income - $0 tax liability). 
Overall, Puritan will have a net income of $600,000 ($330,000 for Year 3 and $300,000 for Year 4) for the two years combined.

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