Negative Operating Income and FCF's
I'm building a DCF model. How do I calculate tax expense when Operating Income (EBIT) is negative to get to FCFs?
Net Operating Loss Carry Forward
Basically here is what you do:
- As the posters said above, if you have negative operating income then you won't have a tax expense in that year.
- When that happens, add the amount by which it was negative to a running total for your NOLs (Net Operating Losses).
- Each year going forward, if your Operating Income is negative then assume no tax expense and add the amount by which it was negative to your NOL balance.
- If it's positive, i.e. you owe taxes, then you need to check your NOL balance. If it exceeds the Operating Income, assume 0 taxes and subtract the Operating Income from the NOL balance. If it's lower than Operating Income, subtract the NOL balance from your Operating Income and apply the tax rate to that new number.
This is actually a simplified view because we're assuming no limit on the NOLs we can apply in a given year - in the real world more factors come into play, but for a DCF analysis this should be fine.
The following video explains the concept of net operating loss carry forwards and backwards.
Recommended Reading
If you have a NEGATIVE tax base (i.e., taxable operating income) then you have no tax expense. Instead, you will either have tax-loss carryforwards or tax-loss carrybacks. Just model these into your future cash flows.
Could someone give me more details on "tax-loss carryforwards"
Dude, just google it. It's not rocket science.
they're called NOLs...
Basically here is what you do:
As the posters said above, if you have negative operating income then you won't have a tax expense in that year.
When that happens, add the amount by which it was negative to a running total for your NOLs (Net Operating Losses).
Each year going forward, if your Operating Income is negative then assume no tax expense and add the amount by which it was negative to your NOL balance.
If it's positive, i.e. you owe taxes, then you need to check your NOL balance. If it exceeds the Operating Income, assume 0 taxes and subtract the Operating Income from the NOL balance. If it's lower than Operating Income, subtract the NOL balance from your Operating Income and apply the tax rate to that new number.
This is actually a simplified view because we're assuming no limit on the NOLs we can apply in a given year - in the real world more factors come into play, but for a DCF analysis this should be fine.
Basically, you want to have a side-calc for taxes instead of just multiplying EBIT by .65 or whatever percent it is.
Also, be sure to check if they already have NOLs from previous years that can still be applied in future years. This can usually be found in the 10-K.
Negative operating income? (Originally Posted: 01/04/2015)
What will be the effect of negative operating income on tax for a fiscal year? How does assets and liability change accordingly?
Outsourcing this question will impact your ROH (return on homework), resulting in reduction in intellectual capital.
That is very true. I used to outsource all my English homework in 1st grade, to employees at the furniture store, a couple stores down from my parents' store. It was amazing, they understood that I needed help since I vividly remember thinking the word "and" and "I" could be used interchangeably. Now I am left with bad grammar and diabetes
How "do," not how "does." With "assets and liability [sic]" you are referring to two separate accounts, so you need to employ a plural verb.
LOLOL
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