HG, Inc., a calendar year corporation, reported the following operating income (loss) before income tax and the enacted tax rates for the last three years of operations:
Income Tax rate
Year 2 $ 100,000 40%
Year 3 $ (300,000) 30%
Year 4 $ 400,000 30%
There are no permanent or temporary differences between operating income (loss) for financial and income tax reporting purposes. When filing its year 3 tax return, HG did not forego to carryback the year 3 loss. What amount should HG record in year 3 to account for the income tax refund receivable?
A- $0
B- $40,000
C -$30,000
D -$120,000
The correct answer is B
This answer is correct because HG elected to carryback the loss. Loss carrybacks can be carried back to the two immediate past periods’ income. Because HG only has one year of income before the loss, the refund is calculated based on that income. HG can only recover taxes already paid (taxable income multiplied by the tax rate in effect). Therefore, the refund receivable would be calculated as $100,000 x 40% = $40,000. The remainder of the loss ($300,000 – $100,000 = $200,000) would be carried forward as a deferred tax asset of $60,000 using the future enacted tax rate ($200,000 x 30% = $60,000).
> HG did not forego to carryback the year 3 loss.
> This answer is correct because HG elected to carryback the loss.
please tell me I'm not the only one who thinks this is worded weird.
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