Question

Quolaf Corp. is in its third year of operations. Olaf had taxable income (loss) as follows:

Year 1: $10,000
Year 2: $(50,000)
Year 3: $20,000
The NOL carryforward at the end of Year 3 is:

a) $30,000

b) $24,000

c) $20,000

d) $34,000

Answer 1

The NOL carryforward at the end of Year 3 for Quolaf Corp. is $20,000, as the remaining loss after offsetting incomes from Year 1 and Year 3 against the Year 2 loss is $20,000.

Step-by-step explanation:

The correct answer to the question is (b) $20,000.

A Net Operating Loss (NOL) occurs when a company's allowable tax deductions exceed its taxable income within a tax year. In the case of Quolaf Corp., the loss in Year 2 amounts to $50,000. This loss can be carried forward to offset taxable income in future years, subject to tax law limitations.

In Year 3, Quolaf Corp. had a taxable income of $20,000. This income can be reduced by the NOL carried forward from Year 2. The original NOL was $50,000, and after offsetting the Year 3 income, the remaining NOL carryforward would be $50,000 (the original NOL) minus $20,000 (the Year 3 taxable income), which equals $30,000.

Calculation Clarification: However, since Quolaf Corp. has a positive income in Year 1 ($10,000), it needs to be considered along with Year 3 income. The NOL is thus applied against the sum of Year 1 and Year 3 income ($10,000 + $20,000 = $30,000). Thus, the NOL carryforward after the end of Year 3 is $50,000 (total NOL) minus $30,000 (combined income for Year 1 and Year 3), resulting in a carryforward of $20,000.