Accounting: Taxes

well growing a lot revenues but losing money not cash

but losing money because of depreciation appreciation of its big

fat fifty million dollars factory It's taken ten million off

this year Got it All right let's go back to

your income statement and peruse these lines So the seven

million dollars instead of just being gone vaporized never to

be heard from again Well that's seven million is repatriated

as losses for the following year which is a lovely

hedge against taxes Yes losses at least from attacks perspective

have value You get to carry those previous years losses

forward into the next year so that if it then

is profitable the previous year's losses make it appear less

profitable when it comes to paying taxes to your friendly

neighborhood i R S agent So in this model the

company earns two point two five million dollars of pretax

income the following year Normally that would carry the thirty

two percent tax rate and a charge of seven hundred

twenty grand And it would look like this But instead

since they had seven million dollars of losses to carry

forward while the cumulative losses of the seven million now

shrinks by the profits the taxable ones of that two

point two five million the company just made So we

still show a loss of four point seven five million

which will then carry forward into next year And yes

there's usually about a seven eight nine year time limit

on these net operating loss Carry forward well at that

time next year Well note that the pretax income is

expected to be over thirty four million dollars Well we

can then deduct the tax loss carry forward so that

instead of paying taxes on the thirty four million bucks

and change there we'll be paying taxes on some amount

under thirty million dollars Got it Because we'll be able

to deduct that loss Carry forward seems like a small

thing but that spread of the four point three million

dollars at a thirty e percent tax rate is well

over a million bucks in tax savings and how did

we get it But we have thirty four point three

million dollars that we would be paying if we didn't

have that net operating loss carry forward But we have

it So we subtract about four point three million there

from the thirty four point three million to give us

thirty million of taxable earnings And there's a smoothing advantage

And all these loss carry forwards as well that the

company's produced that is very generally speaking in bad economic

times Lots of companies lose money but most will live

to fight another profitable day a year or two or

even three later by giving cos this type of quays

I tax credit Well they're encouraged to keep spending even

in bad times rather than you know pulling in the

sales and firing half their workforce because they know that

the extra losses they incur are kind of an asset

or a benefit that they'll reap in the form of

lower taxes in years forward The economy then tends to

recover more quickly and the bad isn't so bad and

the world continues Tio turn and eventually upgrade cars and

airlines and washing machines which are all cyclical in more

ways than one All right well you'll have earned your

soup if you do this function often for your company

And while these various functions seem mundane by paying careful

attention to every niggling detail you the ungh lore if

I'd bean Counter can become a rock star in helping

deliver to the bottom line the job of essentially all

companies which is to produce profits that and you know 00:03:26.28 --> [endTime] have a baseball stadium named after them