In general terms, net operatin
In general terms, net operating loss is a loss that results whena company’s expenses exceed its income.
Respond to the following in a minimum of 175 words:
- What are the tax implications of a net operating loss?
- For how long can an organization carry forward a net operatingloss? Explain your reasoning.
Answer:
Net operating loss is allowed for carry forward so that it canbe used in subsequent years to setoff with the incomes ofsubsequent years.
The reason for carry forward and then set off with future incomeis that some businesses may be seasonal so such business wouldgenerate large income in some year whereas in some years they couldincur losses ,so to reduce the huge burden of taxes in the years ofprofit, the carry forward of losses is allowed.
Net operating losses are allowed to be carried forward untilinfinite time but in one particular year it can be set off upto 80percent of income of that particular year.
For example xyz company incurred net operating loss of 5 milliondollars in year 1 and then in year 2 they generated operatingprofit of 6 million dollars.
So in year 2 set off of net operating loss would be 4.8 milliondollars (6*80/100)
Hence the taxable income of year 2 would be 1.2 million dollars(6-4.8)
And the remaining net operating loss of 0.20 million dollarswould be carried forward till infinite.
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