Net Operating Loss Carryforward Essay

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Every company seeks to reduce its costs and the scale of taxes paid while maintaining as much profit as possible and creating the most favorable plan for allocating funds and assets. There are many tools to do this, including Net Operating Loss (NOL) Carryforward, which allows losses from prior years to be carried forward, thereby reducing income taxes (CFI Team, 2022). In addition, there is a valuation allowance mechanism that balances deferred tax assets, which accomplishes roughly the same goal. Careful operation of these tools allows for minimizing costs for the company, even in the presence of significant losses.

However, in the context of the situation studied, I believe there is no need to plan such reserves and prepare such operations. Although the company had losses in the past, they were spread over only one year. There is no indication of how much the company has lost, which makes the analysis somewhat challenging. In addition, future losses would also only be spread over one year, which, moreover, would only be three years from the present time of the forecast. While the company should certainly prepare for such an event, planning in advance for valuation allowance has a significant downside. Because these funds must serve as an offset to deferred tax assets, their existence in and of itself reduces the company’s income level. Depending on the specific values of profits and losses, such a balance sheet disruption can be very sensitive to the organization. Consequently, given the circumstances and timings of unprofitable years, there is little need to create such funds. Nevertheless, they can be planned, but in a small amount that will not damage the current operations of the company.

Reference

CFI Team. (2022). Corporate Finance Institute. Web.

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IvyPanda. 2023. "Net Operating Loss Carryforward." July 2, 2023. https://ivypanda.com/essays/net-operating-loss-carryforward/.

1. IvyPanda. "Net Operating Loss Carryforward." July 2, 2023. https://ivypanda.com/essays/net-operating-loss-carryforward/.


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IvyPanda. "Net Operating Loss Carryforward." July 2, 2023. https://ivypanda.com/essays/net-operating-loss-carryforward/.

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