 Oh, and welcome to the session. This is Professor Farhat in which we would look at the net operating losses under the CARES Act, or what I'm gonna call them is the COVID rule. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,900 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them and share them. At farhatlectures.com, what I do is I help people either whether they are taking an accounting course or studying for the CPA exam. I don't replace your becker. I don't replace your Roger. I don't replace your Wiley or Glyme or Sarchet account. What I do is I supplement. I'll give you detailed explanation about the topics that you're studying for, plus obviously exercises such as multiple choice, true, false, and exercises to help you prepare for those courses. So I strongly suggest you check out my website, farhatlectures.com, if you are a CPA candidate. Let's take a look at the current rules or the permanent rules. Basically, those rules apply to tax year 2021 and forward, and those are basically the old rules. You can only have a carry forward for any net operating losses, and you can carry those net operating losses indefinitely. You are subject to 80% limitation of the taxable income before NOL, and there's a separate recording. If you're interested, go to my website and you will see the old rules. So these are the old rules. The reason I put them here, just to remind you that in 2021, you have to go back and know the old rules. But for now, I have to teach you the CARES Act, the NOL CARES Act. NOL, it will apply, the new rules will apply to 2018, 2019, and 2020. Hold on a second, did you say 2018? We're already in 2020. Yes, if you have any NOL in 2018, you could go back and file an amended return and use the new rules. So what are the new rules? The new rules is you can carry back your NOL five years, starting with the oldest year, and wherever remaining, you can carry them forward. Now, if you are not familiar with what happened with the President Trump, this is what happened in 2008, 2009. When the financial crisis hit, this is kind of, I'm going on a tangent, it's kind of to make this a little bit more interesting. When the financial crisis hit, President Obama changed the NOL. The NOL used to be, this is like the old, old, old rules, used to be you can go back two years and you can go forward 20 years. This is the old, old rules. So don't even, you know, don't even think about this, okay? So what happened when President Trump came, he made an exception for 2008 and 2009. And for those two years, you can, they allow you to go back five years. And what happened now, President Trump now, back then President Trump, the businessman, what he did, he went back and he amended his return and he get a refund of $70 million because he was able, he took a large loss in 2009, I believe. Yes, in 2009, he took a large loss of $700 million and he went back and he claimed $70 million in refund. He got the refund. And this is the refund that's under audit that you hear about always in the news. I'm not gonna keep talking about this if you're interested. I have a YouTube, like 20 minute YouTube explaining this so you can go to my YouTube channel. So the other thing you wanna know about the COVID rules, they are not subject to 80% limitations. You can go back and offset all of your taxable income, not only 80%. And if you carry back to any years prior to 2018, what's gonna happen is prior to 2018, the tax rate was higher than 21. So it could be 35 or any applicable rate. So whatever that rate was in that year, you will file your amended return or your refund to get based on that tax rate, not 21%. So basically the tax effect of any realizable loss carryback will show on your income statement and your current income. You might have a refund that's gonna show on the balance sheet as a current asset and any remaining losses, if you have any remaining losses after you use the carryback, you're gonna have them as the third taxed asset and all the third taxed asset are non-current. Now the best way to illustrate all these concepts is to work an example. Let's go ahead and do so. Adam's company financial and taxable income were the same in the following years. So we have 2017 income, taxable income of 20,000. Adam paid 35%. So Adam paid 7,000 in 2018, 30,000 times 21%. Adam's corporation pays 6,300 and we are dealing with 2019. In 2019, Adam's had an NOL of 120,000. And in 2020, they expect 20,000 in income. In 2021 and beyond, they expect to have no taxable income. So what's gonna happen under the new rules? Well, let's talk about the old rules first. Under the old rules, what's gonna happen is we're gonna take this 120,000 and we're gonna only look forward and carry it as the third taxed asset for the next whatever years. Now what we can do, on the contrary, now what we're gonna do, we're gonna go back to, first go back to 2017, claim a refund of 7,000, go back to 2018, claim a refund of 6,300. And this is what's gonna happen. We're gonna go back, claim a refund 7,000, 6,300. We're gonna get a refund of 13,300. So we're gonna debit, income tax refund receivable 13,300 and what you credit is income tax benefit but I'm not gonna credit income. I'm gonna put the credit here, income tax benefit. You're gonna see why I am not gonna do that now but the credit is if that's all what you have, you credit income tax benefit, whoops, 13,300. That would have been the entry if that's all what we have, if that's all what we have to do but we're gonna have to do a little bit more of work here and you're gonna see why because we did not use all the NOL, okay? And notice after 2020, we're gonna have zero income. So we have more work to do but this is the first debit and credit but again, this is not gonna be the final credit for income tax benefit. So here's what happened. We have the 120,000 NOL, let's make it negative, NOL. For 20, we're able to reduce 2017, 20,000 and we have remaining NOL of 100,000. Then this is for 2017. For 2018, we used up $30,000 of this NOL for 2018. As a result, we still have 50,000 of NOL. Well, this NOL, it's gonna be carried forward and this is gonna create, hopefully you know this, a third taxed asset based on the future tax rate of 21%. So if we take 21% times 50,000, we're gonna have a third taxed asset of 14,700. And basically this is what's gonna happen. We're gonna have a third taxed asset of 14,700. This is the same computation here. So this is the second debit, 14,700. Now also it would have have done credit income tax benefit, 14,700. So again, we would have do is credit income tax benefit, 14,700. But that's not the end of the story. Here's what we are told here. We are told in this problem and you have to be very careful. This could be given to you in a form of a simulation. You're gonna be told here that after 2021, they don't expect any income. Whoa, whoa, whoa, hold on a second. This is gonna create a problem for me. What's that problem? The problem is I have a third tax asset of 14,700 and I'm not going to realize it. I'm not gonna be able to use it. Why not? Well, why not is they're telling me there is no income. It means I have to create a valuation account. So what does that mean? It means I had, let me go back to my pen here. I had, I have a total of 70,000 remaining. So remember I had the 2100, I'm sorry, I had, I apologize, this number is not 50. This number is 70,000, I apologize. So 70,000 times 21 will give you 14,700. So I have NOL of 70,000 and I'm gonna only be able to use of that NOL the 2020 projected income of 20,000. So what's gonna happen is I'm gonna have an NOL, sorry, this is the 50,000. I'm gonna have unused, unused NOL of $50,000. Well, unused NOL, that's gonna ask me to create a tax valuation account. So I'm gonna take this 50,000 multiplied by 21%. And as a result, I'm gonna have, let's show it here. So I'm gonna have 50,000 times 21%. So I'm gonna have a third taxed asset allowance of 10,500. Simply put, I'm going to credit the third taxed allowance. And as a result, I'm gonna have to reduce, you know, income tax benefit specifically. If you want to be more specific, I have to reduce this one. I have to reduce this income tax benefit by 10,500. So I have to reduce this income tax benefit, basically debit. So simply put, the entry will be, so the entry by itself would look something like this. You debit the third tax allowance and you credit income, I'm sorry. Yes, you debit income tax benefit. The debit should be first, but that's not the point here. So simply put, I have to reduce this account by 14,700. If I reduce it, it's gonna give me 4,200, okay? Now what I'm gonna do, I'm gonna combine those two in one entry as income tax benefit of 17,500, okay? So this is why I did not give you the debit and the credit initially, because at the end I know it's gonna look different. So this is the ending of the income tax benefit, 17,500. So this is the journal entry. Now we wanna see where everything goes on the financial statements. What does that mean? It means how things are presented on the income statement? Because on the CPA exam, they ask a lot of questions about that. So the first thing is the income statement. On the income statement, I'm gonna show 13,300 for the refund and for the, from the deferred tax asset, I'm gonna have 4,200. You remember this number, 17,500, 13,300 and 4,200. And you should know how we came up with this. So this is the current, the current portion and this is the deferred portion. Here they are, current deferred, okay? That's that. Now on the balance sheet, I need to show my income tax refund, which should be a current asset. Hopefully it's a current because you want it as soon as possible within a year. Under non-current assets, you're gonna have the third taxed asset of 14,700, less the allowance. So this is less, remember I put the less here. So the net, the third taxed asset is 4,200, which is also showing on the income statement. So this is basically a question like this. Simply put, a question like this on the CPA exam, I can ask you really 10 multiple, 10, I could ask you 10 different multiple choice questions. I can ask you, for example, what is the current portion of income? What's the deferred portion of income? What is the current assets as a result of the NOL? I can ask you, what is the non-current asset, 4,200 net? I could ask you, what is the deferred taxed asset gross, 14,700. So I can ask you so many different questions or I can show you to tell me what journal entry goes. I can actually ask you, not 10, I can ask you 15 different 15 multiple choice questions. So that's why you have to understand everything. Also, I can give you a problem like this in a form of a simulation. Why not? I can give you this information and ask you to put the journal entry. And that's basically a simulation. Hopefully you'll get something like this. It's an easy simulation once you really know it. As always, I'm gonna remind you to visit farhatlectures.com, especially if you're studying for your CPA exam. Why? Your CPA is a lifetime investment. It's gonna pay dividend for you in the next 30 to 40 years. Don't shortchange yourself. Invest in your education, invest in your CPA. Once you're a CPA, you would recoup all the, if you consider this an expenditure, you would recoup all your expenditure plus more. So it's a great investment in your career. I'm always here to help you study hard. Good luck. And most importantly, stay safe. Look, if the president got infected, we are all under serious risk. Good luck and study hard.