How net operating loss carryforward works?
I was explaining about how the Net operating loss carryforward to other group in other board. maybe some of you might be interested to read (or have different oinion)
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Judicial,
Here's my understanding (which might not be right)
a company has 2 options on how to recognize the tax benefit
let's say a company have $10M NOL carryforward (to expire in 20 years) and the tax corporate tax rate is at 30%
and let's say the company earn $1M per quarter pre tax with no growth.
option 1:
pay no tax each quarter and reduce that NOL carryforward by $300K, and they will start paying tax again after 10 quarters (2 years and a half)
option 2:
they recorded a one time benefit of $2.7M, and show it in Q1 earning statement and Q1 earning will be $3.7M ($1M income from operation + $2.7M tax benefit). notice that the one time benefit is not $3M as 300k is used in Q1), and record those $2.7M in the balance sheet as tax deferred asset.
in Q2, their net income will be $700K (instead of $1M) as they started paying tax in GAAP measure, but they don't actually send the $300K to uncle sam , instead they put them in their balance sheet as cash (in their bank) and reduce the tax deferred asset by $300K.. and this process continue until the tax deferred asset drop to $0 (which is 10 quarters from the first quarter)
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The problem that I don't know is when does company decide to use option one and when to decide to use option two or whether the government decide which one to use for a specific company at a given point of time.
One guideline that I read somewhere (some 10K) was if the company is confident that they can reap all the tax NOL carryforward benefit beofre the expiration (and have demonstrated for several quarter that they have been able to be consistently profitable), they are allowed to choose for option 2.
I personally prefer option 1, as option 2 can bring ignorant and traders and bid the share up then tanks after they find out the next quarter that one time benefit is really turn out to be one time benefit...
that hurts long term shareholder...
JMHO
Stan
