Question

Brindle Corp. is a merchandiser in its first year of operations and has a net loss of $100,000. Brindle expects to be profitable within the next 2 years. The enacted income tax rate is 40%. The income tax benefit from Brindle's NOL is:

A) $20,000
B) $100,000
C) $0
D) $40,000

Answer 1

Under the assumption that Brindle Corp. can carry forward its net operating loss, the income tax benefit from the company's $100,000 NOL, with a 40% tax rate, would be $40,000. Option D is correct answer.

Step-by-step explanation:

The student's question concerns the income tax benefit from a Net Operating Loss (NOL) for Brindle Corp., which is a merchandiser that experienced a net loss of $100,000 and is in its first year of operations. With an enacted income tax rate of 40%, Brindle Corp. is interested in how much of a tax benefit it can expect from this loss.

In general, when a company experiences a net operating loss, it may be able to carry this loss backward or forward to offset taxable income in other years, which can result in a tax refund or reduced tax liability.

However, without more information about carryback and carryforward rules which are specific to the jurisdiction in which Brindle Corp. operates, we cannot determine the exact timing or amount of the tax benefit. Assuming that Brindle Corp. can use the NOL in the future, the value of the NOL at a 40% tax rate would be the loss amount multiplied by the tax rate: $100,000 x 40% = $40,000.

Therefore, the answer is D) $40,000, which represents the potential tax saving the company can utilize when it becomes profitable.