Question on NOLs
Hi guys,
I have a question on Net Operating Losses (NOLs) that has been stumping me for awhile, so was hoping to get some help on this.
Assuming
- EBT: Year 1 $100, Year 2 -$200, Year 3 $300
- Tax: 40%
- NOL: Starting balance $150
I understand that in Y1, the following happens:
- IS: PBT $100, Net income $60 (40% tax)
- Use $100 NOL (from the $150 balance), so NOL-adjusted net income is $0 (and remaining NOL balance is $50). The $100 use of NOL reduces DTA by $40 (tax rate x NOL used)
- CF: Net income $60 + Change in DTA $40 = $100
- BS: Cash +$100, DTA -$40 = $60. Retained earning +$60
I get a little confused when it comes to Y2 - which of the following scenarios is correct?
Scenario 1
- IS: PBT -$200, Net income $0 (no tax)
- Create $200 NOL (so balance is now $50 + $200 = $250). DTA increases by $80 (tax rate x NOL created)
- CF: Net income -$200 - $80 change in DTA = -$280
- BS: Cash -$280, DTA +$80 = -$200. Retained earning -$200
Scenario 2
- IS: PBT -$200, Net income -$120 (40% positive tax)
- Create $200 NOL (so balance is now $50 + $200 = $250). DTA increases by $80 (tax rate x NOL created)
- CF: Net income -$120 - $80 change in DTA = -$200
- BS: Cash -$200, DTA +$80 = -$120. Retained earning -$120
Between Scenario 1 and 2, Scenario 1 seems more logical to be (i.e. PBT = net income) but I struggle a bit with the concept that your cash position decreases by $280 when your PBT was -$200.
Thanks!
Hi MScCandidate1, any of these discussions helpful:
More suggestions...
If those topics were completely useless, don't blame me, blame my programmers...
bump
Scenario 2. You are saying that scenario 1 makes more sense to you because pretax income equals net income, but in actuality your net income is higher (i.e. less negative) than your pretax income to reflect the asset (DTA) you have just created.
You're forgetting a step in your calc., NOLs can only be applied to 80% of the taxable income so in Year 1 you would only be able to apply $80 to the $100 EBT with the remaining $20 of income being taxable. So you would only be utilizing $80 of the NOL beginning balance not $100.
This is correct.
Ipsa sit accusamus quos reprehenderit velit quia quam. Voluptas exercitationem dicta id rerum totam ipsum voluptatibus fugit.
Harum et reiciendis sit. Aliquam qui asperiores tempora ut et est. Asperiores libero fuga libero veritatis exercitationem qui autem vitae. Quod porro quis autem sequi illum pariatur. Eos eum voluptates aliquam optio debitis. Expedita a iste quos aut hic.
Rerum eos placeat recusandae facilis voluptas est consequatur. Repudiandae in est cumque nisi laborum aliquam. Ab suscipit natus est recusandae. Quibusdam ut adipisci qui cupiditate. Doloremque maxime et magni laboriosam doloribus et animi.
Quo ducimus neque dolore sit perspiciatis maxime saepe. A repellat doloribus voluptates dolores. Commodi iste vero rem. Animi maiores dolor qui autem culpa in quo sunt. Enim sed blanditiis qui sequi assumenda corrupti non. Odio impedit aut optio sint suscipit voluptate ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...