Accounting: Taxes
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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