Final Answer:
a. In 2020, WCC's taxable income is $0 (after the net operating loss deduction). In 2021, WCC's taxable income is $70,000 ($30,000 of taxable income - $100,000 NOL carryover from 2019).
b. In 2020, WCC's taxable income is $75,000 - $100,000 = ($25,000) loss (after the net operating loss deduction). In 2021, WCC's taxable income is $30,000 - $100,000 = ($70,00) loss (after the net operating loss deduction).
Step-by-step explanation:
a. In 2020, WCC can deduct its entire $100,00 NOL carryover from 2016 since it has sufficient taxable income to absorb the loss.
Therefore, WCC's taxable income in 2020 is zero after the net operating loss deduction. In 2021, WCC can carry over the remaining $55,556 ($144,444 - $88,888) of NOL from 2016 to offset its taxable income of $30,00 in that year. As a result, WCC's taxable income in 2021 is reduced by $75,556 ($35,556 from the NOL carryover from 2016 and $40,00 from the NOL carryover from 2019), resulting in a taxable income of $75,556 - $75,556 = $75,556 - $75,556 = ($75,556) loss (after the net operating loss deduction).
b. In 2020, WCC cannot fully utilize its NOL carryover from 2019 since its taxable income of $75,00 in that year is less than the NOL carryover amount of $100,00. Therefore, WCC can only deduct the amount of its taxable income in 2021 that is less than or equal to its remaining NOL carryover from 2019.
The remaining NOL carryover from 2019 will be carried forward to future years until fully utilized or expired. As a result, WCC's book-tax difference associated with the NOL in 2021 is temporary since it will be reversed when the remaining NOL carryover from 2019 is utilized or expired in future years. The book-tax difference for 2021 is calculated as follows:
Book Income: Tax Income:
Taxable Income Taxable Income
Less: Net Operating Loss Carryover Less: Net Operating Loss Carryover
--------------------------------- ---------------------------------
Book Income Book Income
--------------------------------- ---------------------------------
Book-Tax Difference Book-Tax Difference
--------------------------------- ---------------------------------
In this case:
Book Income: Tax Income:
$35,556 $35,556
Less: Net Operating Loss Carryover Less: Net Operating Loss Carryover
--------------------------------- ---------------------------------
($75,556) Loss ($75,556) Loss
--------------------------------- ---------------------------------
Book Income Book Income
--------------------------------- ---------------------------------
($43,336) Loss ($43,336) Loss
--------------------------------- ---------------------------------
Book-Tax Difference Book-Tax Difference
--------------------------------- ---------------------------------
Temporary Difference Temporary Difference