EXHIBIT 16-6 Net Operating Loss Carryback and Carryover Summary Tax Year NOL Originated Beginning before 2018 Carrybacks Carrybacks Back two years.*Can offset 100% of taxable income before the NOL Forward 20 years. Can offset 100% of taxable income before the NOL deduction. deduction in carryback years. Back five years.*Can offset up to Carried forward indefinitely. Can offset up to 100% of taxable income before the NOL deduction in 100% of taxable income before tax years beginning before 2021. In tax years beginning after 2020, can offset up to 80 percent of the NOL deduction in carryback taxable income after deducting NOL carryovers from NOLs originating in tax years beginning before years. 2018. Carried forward indefinitely. Can offset up to 80 percent of taxable income remaining after deducting Not allowed. NOL carryovers from NOLs originating in tax years beginning before 2018. Beginning after 2017 and before 2021 Beginning after 2020 *A corporation can elect to forgo the NOL carryback and simply carry the NOL forward to future years. Also, if a corporation carries back a NOL, it must carry it back to the earliest year first (i.e., two years prior or five years prior, depending on the year the NOL originated). [The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began business on January 1, 2021. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corporation Income statement For current year Revenue from sales Cost of Goods Sold Gross profit Book Income $ 41,000,000 (27,675,000) $ 13,325,000 300,0001 24,0002 (4,000) 3,0003 50,000 $ 13,698,000 Other income: Income from investment in corporate stock Interest income Capital gains (losses) Gain or loss from disposition of fixed assets Miscellaneous income Gross Income Expenses: Compensation Stock option compensation Advertising Repairs and Maintenance Rent Bad Debt expense Depreciation Warranty expenses Charitable donations Meals (all at restaurants) Goodwill impairment Organizational expenditures Other expenses Total expenses Income before taxes Provision for income taxes (7,510,000)4 (210,000)5 (1,360,000) (80,000) (27,000) (46,000)6 (1,525,000)7 (80,000)8 (500,000) (19,000) (32,500)10 (47,000) 11 (150,000) 12 $ (11,586,500) $ 2, 111,500 (400,000) 13 $ 1,711,500 Net Income after taxes 1. XYZ owns 30% of the outstanding Hobble Corporation (HC) stock. Hobble Corporation reported $1,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method, and it recorded its pro rata share of HC's earnings for the year. HC also distributed a $200,000 dividend to XYZ. For tax purposes, HC reports the actual dividend received as income, not the pro rata share of HC's earnings. 2. Of the $24,000 interest income, $6,000 was from a City of Seattle bond, $8,000 was from a Tacoma City bond, $7,000 was from a fully taxable corporate bond, and the remaining $3,000 was from a money market account. 3. This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as $1231 gain). 4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation). 5. This amount is the portion of incentive stock option compensation that was expensed during the year (recipients are officers). 6. XYZ actually wrote off $29,500 of its accounts receivable as uncollectible. 7. Tax depreciation was $2,025,000. 8. In the current year, XYZ did not make any actual payments on warranties it provided to customers. 9. XYZ made $500,000 of cash contributions to qualified charities during the year. The donations are qualified charitable contributions for purposes of determining the charitable contribution limitation. 10. On July 1 of this year XYZ acquired the assets of another business. In the process, it acquired $315,000 of goodwill. At the end of the year, XYZ wrote off $32,500 of the goodwill as impaired. 11. XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes. 12. The other expenses do not contain any items with book-tax differences. 13. This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes. Estimated tax information: XYZ made four equal estimated tax payments totaling $394,000 ($100,000 per quarter). For purposes of estimated tax liabilities, assume XYZ was in existence in 2020 and that in 2020 it reported a tax liability of $556,000. During 2021, XYZ determined its taxable income at the end of each of the four quarters as follows: Quarter-end First Second Third Cumulative taxable income (loss) $ 425,000 $ 1,125,000 $ 1,450,000 Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations. (Do not round intermediate calculations. Round your answers to the nearest dollar amount.) a. Compute XYZ's taxable income. Taxable income b. Compute XYZ's income tax liability. Tax liability Schedule M1 Schedule M1 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books 2 Federal income tax per books 3 Excess of capital losses over capital gains 4 Income subject to tax not recorded on books this year (itemize): 7 Income recorded on books this year not included on this return (itemize): Tax-exempt interest 0 5 Expenses recorded on books this year not deducted on this return (itemize): a Depreciation b Charitable contributions C Travel and entertainment Other (itemize): 08 Deductions on this return not charged against book income this year (itemize): a Depreciation b Charitable contributions c Other (itemize): $ 09 Add lines 7 and 8 Stock option compensation (incentive stock options) Bad debt expense Warranty expense Goodwill impairment Organizational expenditures 6 Add lines 1 through 5 $ 0 10 Income (page 1, line 28)-line 6 less line 9 THIS FORM IS A SIMULATION OF AN OFFICIAL U.S. TAX FORM. IT IS NOT THE OFFICIAL FORM ITSELF. DO NOT USE THIS FORM FOR TAX FILINGS OR FOR ANY PURPOSE OTHER THAN EDUCATIONAL. 2021 McGraw-Hill Education.