Question

A net operating loss carryforward creates a tax benefit on the income statement in the year:

a) When the carryforward is used
b) When the net operating loss occurs
c) When the deferred tax asset reverses
d) When the net operating loss carryforward expires

Answer 1

A net operating loss carryforward creates a tax benefit on the income statement in the year it is used to offset taxable income.

Step-by-step explanation:

A net operating loss carryforward creates a tax benefit on the income statement in the year when the carryforward is used to reduce taxable income.

An explanation of this concept revolves around the functionality of net operating loss (NOL) carryforwards within the domain of corporate taxation. Businesses can use NOLs to offset future taxable income, effectively lowering their tax liability in profitable years following the loss.

This accounting process is reflected in the income statement as a tax benefit, often observed through a reduced effective tax rate or an increase in the net income due to the reduced tax expense. It's important to remember that the benefit is recognized in the financial statements when the NOL is actually applied against the income of a future period, not when the loss is originally incurred or when the deferred tax asset associated with the NOL reverses or expires.