Question

During 2018, its first year of operations, Baginski Steel Corporation reported a net operating loss of $375,000 for financial reporting and tax purposes. The enacted tax rate is 40%. Required: 1. Prepare the journal entry to recognize the income tax benefit of the net operating loss. Assume the weight of available evidence suggests future taxable income sufficient to benefit from future deductible amounts from the net operating loss carryforward. 2. Show the lower portion of the 2018 income statement that reports the income tax benefit of the net operating loss.
This is from the Intermediate Accounting book 9th edition by authors :Spiceland, Nelson, Thomas. It is E-16-20. If the taxable loss is allowed to be carried forward, then how come it shows a loss in the 2018 income statement? Shouldn't it just reflect in future income statements?

Answer 1

Okay, so I am answering the question which is typed by you and understanding your doubt by this statement you made.

Firstly, We need to understand one thing that every business has two sets of accounting books, one for business use and one for tax purpose.

Books for tax purpose are required to be tax laws complaint.

This is required because Income tax laws and accounting laws could differ significantly in some cases.

lets take a example to understand it better.

A business has loss of $100. Income tax laws in that country allows loss to be carry forwarded for next 4 years.

Firstly, in personal books of business there is no need to record this loss in balance sheet.

BUT in books for taxation purpose, we shall carry forward this loss and show the remaining amount in balance sheet as asset. Why? because this loss would help us to pay NO OR LOWER TAXES for next 4 years.