NOLs on Three Statements

Hey - I was reading the M&I 400, and one of the questions they asked was: "How do NOLs affect a company's 3 statements?". The answer they gave was that you should "create a book vs. cash tax schedule where you calculate the Taxable Income based on NOLs, and then look at what you would pay in taxes without the NOLs. Then you book the difference as an increase to the Deferred Tax Liability on the Balance Sheet."

I'm slightly confused as to why they reference DTLs in the answer and not DTAs (I thought NOLs corresponded with DTAs). I'm also confused about why they are adding the difference between Taxable Income based on NOLs and what you pay in taxes w/o NOLs. Shouldn't we just be adding the difference between what we pay in taxes with and without NOLs to deferred taxes?? Maybe I'm missing something here. Would greatly appreciate any help - thanks!

Comments (5)

1y 
Sr2009, what's your opinion? Comment below:

You got it right.

10d 
oneofmanymonkeyshere, what's your opinion? Comment below:

Did you get an answer for this? Would be curious since I'm also confused on this question.

9d 
dirtypotato, what's your opinion? Comment below:

NOLs are a GAAP metric, and therefore reduce taxable income on a book basis. DTLs come into place because a difference arises between book taxes and cash taxes, as you alluded to previously. Therefore, when calculating book taxes your basis (pre-tax income) is going to be lower because the NOLs have been applied vs cash taxes where the basis is higher due to no NOLs reducing pre-tax income. Since the IRS doesn't give a fuck about NOLs a DTL arises because of the difference in basis (book vs cash). At some point down the line (no pun intended), a special payment will likely need to be made to the IRS to bring taxes back in line

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2h 
oneofmanymonkeyshere, what's your opinion? Comment below:

dirtypotato

NOLs are a GAAP metric, and therefore reduce taxable income on a book basis. DTLs come into place because a difference arises between book taxes and cash taxes, as you alluded to previously. Therefore, when calculating book taxes your basis (pre-tax income) is going to be lower because the NOLs have been applied vs cash taxes where the basis is higher due to no NOLs reducing pre-tax income. Since the IRS doesn't give a fuck about NOLs a DTL arises because of the difference in basis (book vs cash). At some point down the line (no pun intended), a special payment will likely need to be made to the IRS to bring taxes back in line

Hey, thanks for the response. Could you also help me understand whether NOLs create DTLs or DTAs? The M&I 400 guide says that NOLs create DTLs, but I also see a lot about how it creates DTAs instead. I'm not sure how to interpret this.

Also, there's another line that says that the quick way to do this is to reduce taxable income by NOL, apply the tax rate, and "subtract that new Tax number from the old Pretax Income number (which should stay the same)." Why would you reduce taxable income by NOL and subtract the new tax number---won't this double count the effect of NOL? And what are the things that should stay the same?

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2h 
DilutedEPS, what's your opinion? Comment below:

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