Question

Quiclet Olaf 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 Quiclet Olaf Corp. is $30,000, calculated by summing the profits and losses over the three years and applying them accordingly.

Step-by-step explanation:

The calculation of the Net Operating Loss (NOL) carryforward involves summing the profits and losses over the three years. For Quiclet Olaf Corp., this involves adding Year 1's profit of $10,000 to Year 3's profit of $20,000, and then subtracting Year 2's loss of $(50,000), resulting in a NOL carryforward at the end of Year 3 of $30,000.

A net operating loss occurs when a company's allowable tax deductions exceed its taxable income within a tax period. The U.S. tax code allows businesses to use these losses to offset future taxable income, known as NOL carryforwards. Specifically, in Year 1, Olaf had a profit of $10,000, which was then offset by a loss of $50,000 in Year 2. In Year 3, the company returned to profitability with $20,000 in income. To determine the NOL carryforward, you start by offsetting the most recent profits with any losses. Therefore, Year 2's loss completely offsets Year 1's gain, and leaves us with a remaining NOL of $40,000. Then, Year 3's profit of $20,000 is subtracted from this remaining NOL, leaving us with an NOL carryforward of $30,000 at the end of Year 3.