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Accounting: Taxes 1 Views


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00:00

Accounting Allah shmoop taxes Yeah you knew we'd get there

00:06

We're just going to conclude our little pillow story with

00:09

a pink ribbon around the present Note that the seven

00:11

million dollars of losses that they just had there's not

00:15

simply evaporate rights We have a little pillow company doing

00:18

well growing a lot revenues but losing money not cash

00:22

but losing money because of depreciation appreciation of its big

00:25

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

00:28

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

00:29

your income statement and peruse these lines So the seven

00:32

million dollars instead of just being gone vaporized never to

00:35

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

00:39

as losses for the following year which is a lovely

00:43

hedge against taxes Yes losses at least from attacks perspective

00:48

have value You get to carry those previous years losses

00:51

forward into the next year so that if it then

00:54

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

00:58

profitable when it comes to paying taxes to your friendly

01:01

neighborhood i R S agent So in this model the

01:03

company earns two point two five million dollars of pretax

01:06

income the following year Normally that would carry the thirty

01:09

two percent tax rate and a charge of seven hundred

01:11

twenty grand And it would look like this But instead

01:14

since they had seven million dollars of losses to carry

01:17

forward while the cumulative losses of the seven million now

01:20

shrinks by the profits the taxable ones of that two

01:23

point two five million the company just made So we

01:26

still show a loss of four point seven five million

01:28

which will then carry forward into next year And yes

01:32

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

01:35

on these net operating loss Carry forward well at that

01:37

time next year Well note that the pretax income is

01:40

expected to be over thirty four million dollars Well we

01:44

can then deduct the tax loss carry forward so that

01:47

instead of paying taxes on the thirty four million bucks

01:50

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

01:52

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

01:55

to deduct that loss Carry forward seems like a small

01:58

thing but that spread of the four point three million

02:01

dollars at a thirty e percent tax rate is well

02:04

over a million bucks in tax savings and how did

02:06

we get it But we have thirty four point three

02:08

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

02:11

have that net operating loss carry forward But we have

02:14

it So we subtract about four point three million there

02:16

from the thirty four point three million to give us

02:19

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

02:23

And all these loss carry forwards as well that the

02:25

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

02:30

times Lots of companies lose money but most will live

02:33

to fight another profitable day a year or two or

02:36

even three later by giving cos this type of quays

02:39

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

02:42

in bad times rather than you know pulling in the

02:45

sales and firing half their workforce because they know that

02:48

the extra losses they incur are kind of an asset

02:50

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

02:53

lower taxes in years forward The economy then tends to

02:56

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

02:59

the world continues Tio turn and eventually upgrade cars and

03:03

airlines and washing machines which are all cyclical in more

03:06

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

03:08

soup if you do this function often for your company

03:10

And while these various functions seem mundane by paying careful

03:13

attention to every niggling detail you the ungh lore if

03:16

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

03:19

deliver to the bottom line the job of essentially all

03:22

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

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