Financial Modeling
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Re: Estimated Taxes
Hi, I am having trouble understanding the impact of NOL on the cash flow statement.
Correct me if I'm wrong on this: If I apply a NOL carry forward this year to reduce my taxable income, my net income will increase by tax rate x NOL balance.
On my cash flow statement, my cash has already increased...
Hi, I am having trouble understanding the impact of NOL on the cash flow statement.
Correct me if I'm wrong on this: If I apply a NOL carry forward this year to reduce my taxable income, my net income will increase by tax rate x NOL balance.
On my cash flow statement, my cash has already increased by this amount since net income flows through, but do I adjust for the change in the deferred tax asset account when I'm adjusting for changes in working capital? If so, it almost seems like double-counting (increase from cash due to 1. net income increase and 2. decrease in DTA).
Basically, I'm trying to figure out if applying a NOL creates an additional cash event due to the change in deferred tax assets. I feel like I am missing an accounting entry here.
My logic….
1. Net income is higher due to the usage of DTA (i.e. +2000)
2. Cash flow from operations is higher due to higher Net income and the reduction in DTA (i.e. +2000 from NI and +2000 from DTA)
So cash flow is +4000 from the effects of 1 and 2. This seems like double counting to me….
Maybe recording the journal entries would be helpful for me to understand this better. Thanks for the help. Read More
Correct me if I'm wrong on this: If I apply a NOL carry forward this year to reduce my taxable income, my net income will increase by tax rate x NOL balance.
On my cash flow statement, my cash has already increased by this amount since net income flows through, but do I adjust for the change in the deferred tax asset account when I'm adjusting for changes in working capital? If so, it almost seems like double-counting (increase from cash due to 1. net income increase and 2. decrease in DTA).
Basically, I'm trying to figure out if applying a NOL creates an additional cash event due to the change in deferred tax assets. I feel like I am missing an accounting entry here.
My logic….
1. Net income is higher due to the usage of DTA (i.e. +2000)
2. Cash flow from operations is higher due to higher Net income and the reduction in DTA (i.e. +2000 from NI and +2000 from DTA)
So cash flow is +4000 from the effects of 1 and 2. This seems like double counting to me….
Maybe recording the journal entries would be helpful for me to understand this better. Thanks for the help. Read More
Re: Estimated Taxes
We think your starting premise is wrong to begin with.
Net Income is a GAAP number and as such reflects the full tax load (higher or lower, depending on NOL created or used).
In other words, EBT is $1000. GAAP taxes is $400 (assume 40% for simplicity across the board).
Net Income is therefore $600....
We think your starting premise is wrong to begin with.
Net Income is a GAAP number and as such reflects the full tax load (higher or lower, depending on NOL created or used).
In other words, EBT is $1000. GAAP taxes is $400 (assume 40% for simplicity across the board).
Net Income is therefore $600.
Assume you had a $200 NOL that you used up. Thus CASH taxes is $800 x 40% = $320.
You might want to split that as Current Taxes of $320 and Deferred of $80.
The $80 difference does NOT hit the Income Statement, but lowers DTA on the BS.
As DTA goes down, CFO goes UP as this asset goes down. and Cash Flow statement is reconciled.
Viola.
This is covered extensively and modeled out in our Enhancements Part II course on Taxes. DTA, DTL, Section 382 caps, etc. Read More
Net Income is a GAAP number and as such reflects the full tax load (higher or lower, depending on NOL created or used).
In other words, EBT is $1000. GAAP taxes is $400 (assume 40% for simplicity across the board).
Net Income is therefore $600.
Assume you had a $200 NOL that you used up. Thus CASH taxes is $800 x 40% = $320.
You might want to split that as Current Taxes of $320 and Deferred of $80.
The $80 difference does NOT hit the Income Statement, but lowers DTA on the BS.
As DTA goes down, CFO goes UP as this asset goes down. and Cash Flow statement is reconciled.
Viola.
This is covered extensively and modeled out in our Enhancements Part II course on Taxes. DTA, DTL, Section 382 caps, etc. Read More
Re: Estimated Taxes
Thanks for the reply.
Yes that makes complete sense. I think what threw me off was the fact that my company's provision for taxes has averaged around 2% of pretax income for previous years. I believe they pay the alternative minimum corporate income tax. Also they have enough NOL to offset the e...
Thanks for the reply.
Yes that makes complete sense. I think what threw me off was the fact that my company's provision for taxes has averaged around 2% of pretax income for previous years. I believe they pay the alternative minimum corporate income tax. Also they have enough NOL to offset the entire pretax income...
I'm not sure how this affects the logic you mentioned above.
Example:
EBT 1000
Tax (2%) 20
NI 980
Assume NOL $1000
Taxes Payable would be 0 due to the use of the entire NOL
Deferred taxes would be $20
So in the cash flow statement DTA would decrease by 20 and the CFO would be NI + DTA = 1000?? Read More
Yes that makes complete sense. I think what threw me off was the fact that my company's provision for taxes has averaged around 2% of pretax income for previous years. I believe they pay the alternative minimum corporate income tax. Also they have enough NOL to offset the entire pretax income...
I'm not sure how this affects the logic you mentioned above.
Example:
EBT 1000
Tax (2%) 20
NI 980
Assume NOL $1000
Taxes Payable would be 0 due to the use of the entire NOL
Deferred taxes would be $20
So in the cash flow statement DTA would decrease by 20 and the CFO would be NI + DTA = 1000?? Read More
Re: Estimated Taxes
No, per our previous response, GAAP taxes is $400. NI is $600.
You are confusing GAAP accounting with Cash accounting.
Deferred Taxes would be $400-$20=$380
$20 is "current portion" and assumed to be paid OUT IN CASH that year (or taxes payable up by $20, considered to be part of working ...
No, per our previous response, GAAP taxes is $400. NI is $600.
You are confusing GAAP accounting with Cash accounting.
Deferred Taxes would be $400-$20=$380
$20 is "current portion" and assumed to be paid OUT IN CASH that year (or taxes payable up by $20, considered to be part of working capital, and not to be confused with DTA or DTL).
Thus, CFO is NI of $600 + change in DTA of $380 = $980.
May we please recommend our Enhancements Part II course? We spell it out completely and in Excel there.
http://www.wallst-training.com/self-stu ... l#package3
You can purchase that course standalone without Part I or the Core Model.
We HIGHLY recommend it because we also teach how to incorporate future NOLs created as they are different streams of offsetting especially in the context of an acquisition or investment. Read More
You are confusing GAAP accounting with Cash accounting.
Deferred Taxes would be $400-$20=$380
$20 is "current portion" and assumed to be paid OUT IN CASH that year (or taxes payable up by $20, considered to be part of working capital, and not to be confused with DTA or DTL).
Thus, CFO is NI of $600 + change in DTA of $380 = $980.
May we please recommend our Enhancements Part II course? We spell it out completely and in Excel there.
http://www.wallst-training.com/self-stu ... l#package3
You can purchase that course standalone without Part I or the Core Model.
We HIGHLY recommend it because we also teach how to incorporate future NOLs created as they are different streams of offsetting especially in the context of an acquisition or investment. Read More
Re: Estimated Taxes
I actually took that course but I am still confused....Apologies for my lack of understanding.
The company I follow has provision for taxes which I assume means income tax expense of 2%, not 40%.
Thus GAAP Net income is pretax income * (1-2%).
They have NOLs that offset pretax income for sev...
I actually took that course but I am still confused....Apologies for my lack of understanding.
The company I follow has provision for taxes which I assume means income tax expense of 2%, not 40%.
Thus GAAP Net income is pretax income * (1-2%).
They have NOLs that offset pretax income for several years into the future. Thus, no taxes payable.
Based on THIS scenario and with these parameters
End Pretax Income = $1000
DTA beginning of period = $5000
What is Net income at end of year, DTA at end of year, and what is Cash flow from operations at end of year? I apology in advance for taking up so much time...this has been bugging me for a while now. Read More
The company I follow has provision for taxes which I assume means income tax expense of 2%, not 40%.
Thus GAAP Net income is pretax income * (1-2%).
They have NOLs that offset pretax income for several years into the future. Thus, no taxes payable.
Based on THIS scenario and with these parameters
End Pretax Income = $1000
DTA beginning of period = $5000
What is Net income at end of year, DTA at end of year, and what is Cash flow from operations at end of year? I apology in advance for taking up so much time...this has been bugging me for a while now. Read More
Re: Estimated Taxes
So, you're saying instead of 40% rate, their effective tax rate is 2%. Replace our previous answer with the new 2% instead of 40% and combined with your previous calculation of NI, re-do the math as such:
EBT of $1,000
Taxes of $20
NI of $980 as you stated previously.
Starting DTA of $5,000 implie...
So, you're saying instead of 40% rate, their effective tax rate is 2%. Replace our previous answer with the new 2% instead of 40% and combined with your previous calculation of NI, re-do the math as such:
EBT of $1,000
Taxes of $20
NI of $980 as you stated previously.
Starting DTA of $5,000 implies a massive NOL of $5K/2% = $250K.
B/c $250K loss at 2% rate = $5K savings of future taxes
So DTA now is $5,000 less $20 = $4,980 (end of year)
CFO is NI of $980 + decrease of DTA of $20 = $1,000
Side Note: Ending NOL is now $249K
Rinse and repeat next year! Read More
EBT of $1,000
Taxes of $20
NI of $980 as you stated previously.
Starting DTA of $5,000 implies a massive NOL of $5K/2% = $250K.
B/c $250K loss at 2% rate = $5K savings of future taxes
So DTA now is $5,000 less $20 = $4,980 (end of year)
CFO is NI of $980 + decrease of DTA of $20 = $1,000
Side Note: Ending NOL is now $249K
Rinse and repeat next year! Read More
Re: Estimated Taxes
You are referring to modeling out NOL (net operating losses). The basic idea is that if a company has, say $100 of NOLs that can be carried forward to deduct against future Taxable Income, this will lower future taxes. For instance, say that $100 NOL company makes $60 next year, and then $120 the ye...
You are referring to modeling out NOL (net operating losses). The basic idea is that if a company has, say $100 of NOLs that can be carried forward to deduct against future Taxable Income, this will lower future taxes. For instance, say that $100 NOL company makes $60 next year, and then $120 the year after, it would pay $0 (zero) in taxes next year, since all of the $60 would get removed due to the $100 existing NOL balance, with $40 NOL left. Thus, the year after, Taxable Income gets reduced from $120 to $80 (the remaining $40 NOL offsetting the income) and the company only pays taxes on $80 of income.
Thus, your easiest bet is to set up a reconciliation schedule that goes from Pre-Tax Income (GAAP) minus any use of NOL to get Taxable Income. Actual taxes are paid off Taxable Income. If an NOL is used up, the Deferred Tax Asset on the balance sheet goes down. The dynamic part is that if Pre-Tax Income is negative (made another loss), the NOL balance increases and so does Deferred Tax Assets. Don't forget, DTA is the amount of NOL used or generated x statutory tax rate.
Your reference to differences in D&A (straight line for GAAP and accelerated for tax) is regarding Deferred Tax Liabilities and you are correct in that it is not related to DTA and NOLs!
For more information, check out our Enhancements Part 2 course that focuses on modeilng out dynamic and robust tax schedule:
www.wstselfstudy.com/programs.html and click on package 3: Advanced Financial Modeling or go here directly:
http://www.wstselfstudy.com/package3-1.html Read More
Thus, your easiest bet is to set up a reconciliation schedule that goes from Pre-Tax Income (GAAP) minus any use of NOL to get Taxable Income. Actual taxes are paid off Taxable Income. If an NOL is used up, the Deferred Tax Asset on the balance sheet goes down. The dynamic part is that if Pre-Tax Income is negative (made another loss), the NOL balance increases and so does Deferred Tax Assets. Don't forget, DTA is the amount of NOL used or generated x statutory tax rate.
Your reference to differences in D&A (straight line for GAAP and accelerated for tax) is regarding Deferred Tax Liabilities and you are correct in that it is not related to DTA and NOLs!
For more information, check out our Enhancements Part 2 course that focuses on modeilng out dynamic and robust tax schedule:
www.wstselfstudy.com/programs.html and click on package 3: Advanced Financial Modeling or go here directly:
http://www.wstselfstudy.com/package3-1.html Read More
Re: Estimated Taxes
Thanks for the prompt response.
So to break this down to absolute basics, I go to the income taxes footnote and look for the current Operating Loss Carry Forwards balance. If there is a positive (there is a pool of losses) then in my projections I reduced future/projected pretax income dollar ...
Thanks for the prompt response.
So to break this down to absolute basics, I go to the income taxes footnote and look for the current Operating Loss Carry Forwards balance. If there is a positive (there is a pool of losses) then in my projections I reduced future/projected pretax income dollar for dollar. If I use up the entire loss balance in that quarter and therefore still have some EBT, then I can use a statutory tax rate to estimate cash taxes correct?
I understand what you said about how to calculate the Defered tax assets and deferred tax liabilities.
Thank you Read More
So to break this down to absolute basics, I go to the income taxes footnote and look for the current Operating Loss Carry Forwards balance. If there is a positive (there is a pool of losses) then in my projections I reduced future/projected pretax income dollar for dollar. If I use up the entire loss balance in that quarter and therefore still have some EBT, then I can use a statutory tax rate to estimate cash taxes correct?
I understand what you said about how to calculate the Defered tax assets and deferred tax liabilities.
Thank you Read More
Re: Estimated Taxes
Yes, correct. Now, if the company generates additional NOLs in your projected periods, then don't forget to increase NOL amount by that amount. Obviously at that point, no cash taxes since no profit (Taxable Income). And DTA up if NOL up.
Re: Estimated Taxes
A saw a sort of rule of thumb while on-line --- in order to determine actual cash taxes (as in the actual amount paid to the government).
The reason why I have been asking about this is that, cash taxes are very commonly used in a the FCF calculation in my field that usually goes as follows: (E...
A saw a sort of rule of thumb while on-line --- in order to determine actual cash taxes (as in the actual amount paid to the government).
The reason why I have been asking about this is that, cash taxes are very commonly used in a the FCF calculation in my field that usually goes as follows: (EBITDA)-(INTEREST)-(CAPX)-(Change in WORKING CAPITAL)-(CASH TAXES) - (OTHER) = FCF
Their approach below is to......Start with book taxes from the income statement. From there, either add the year over year increase in the company's deferred income tax liability (or subtract increase in the company's deferred tax asset) ... etc...
Anyway, here is the actual blurb.......
"How Do We Calculate a Company's Cash Taxes?"
Advanced Approach. In this approach, we make a number of detailed adjustments.
1. Book taxes. We start with a company's income tax provision found on the income statement.
2. Change in deferred taxes. Next, we add the year-to-year increase in a company's deferred income tax liability (or subtract the increase in a company's deferred tax asset). These line items can be found on a company's balance sheet. However, sometimes, this liability is not separately broken out. In those cases, there are two alternate sources for a company's change in deferred taxes:
"Adjustments to reconcile net income to net cash provided by operating activities" in the "Cash flows from operating activities" section of the Cash Flow Statement. A deferred tax liability occurs when a company pays less in cash taxes than it reports in book taxes. Thus, an increase in a company's deferred tax liability represents a source of cash. Conversely, a deferred tax asset occurs when a company pays more in cash taxes than it reports in book taxes. Thus, an increase in a company's deferred tax asset represents a use of cash.
The Income Taxes section of the Notes to the Consolidated Financial Statements, where the 10-K will list the "components of the provision for income taxes". We subtract the sum of the annual U.S. and Foreign deferred income taxes from a company's income tax provision. When annual U.S. and foreign deferred taxes are positive, the company has increased its net deferred tax liability, which reduces the tax onus. Conversely, when annual U.S. and foreign deferred taxes are negative, the company has increased its net deferred tax asset, which increases the tax onus. (Note: the sum of U.S. and Foreign deferred income taxes should be identical to the number in the Cash Flow Statement.)
Do you agree with this approach or no? Or even partially?
Thanks Read More
The reason why I have been asking about this is that, cash taxes are very commonly used in a the FCF calculation in my field that usually goes as follows: (EBITDA)-(INTEREST)-(CAPX)-(Change in WORKING CAPITAL)-(CASH TAXES) - (OTHER) = FCF
Their approach below is to......Start with book taxes from the income statement. From there, either add the year over year increase in the company's deferred income tax liability (or subtract increase in the company's deferred tax asset) ... etc...
Anyway, here is the actual blurb.......
"How Do We Calculate a Company's Cash Taxes?"
Advanced Approach. In this approach, we make a number of detailed adjustments.
1. Book taxes. We start with a company's income tax provision found on the income statement.
2. Change in deferred taxes. Next, we add the year-to-year increase in a company's deferred income tax liability (or subtract the increase in a company's deferred tax asset). These line items can be found on a company's balance sheet. However, sometimes, this liability is not separately broken out. In those cases, there are two alternate sources for a company's change in deferred taxes:
"Adjustments to reconcile net income to net cash provided by operating activities" in the "Cash flows from operating activities" section of the Cash Flow Statement. A deferred tax liability occurs when a company pays less in cash taxes than it reports in book taxes. Thus, an increase in a company's deferred tax liability represents a source of cash. Conversely, a deferred tax asset occurs when a company pays more in cash taxes than it reports in book taxes. Thus, an increase in a company's deferred tax asset represents a use of cash.
The Income Taxes section of the Notes to the Consolidated Financial Statements, where the 10-K will list the "components of the provision for income taxes". We subtract the sum of the annual U.S. and Foreign deferred income taxes from a company's income tax provision. When annual U.S. and foreign deferred taxes are positive, the company has increased its net deferred tax liability, which reduces the tax onus. Conversely, when annual U.S. and foreign deferred taxes are negative, the company has increased its net deferred tax asset, which increases the tax onus. (Note: the sum of U.S. and Foreign deferred income taxes should be identical to the number in the Cash Flow Statement.)
Do you agree with this approach or no? Or even partially?
Thanks Read More
Re: Estimated Taxes
The concept of "cash taxes" in FCFF calculation is not to get actual cash taxes paid. We normally just take your tax rate * EBIT = NOPAT. Please see our Corporate Valuation course and DCF Modeilng for more detail. DTA and DTL is not considered "operations" in the sense that worki...
The concept of "cash taxes" in FCFF calculation is not to get actual cash taxes paid. We normally just take your tax rate * EBIT = NOPAT. Please see our Corporate Valuation course and DCF Modeilng for more detail. DTA and DTL is not considered "operations" in the sense that working capital is. Taxes payable will get paid very shortly; although taxes payable is like accounts payable (which is part of FCFF in change in working capital portion); the idea is that if you were to buy the company, all the taxes payable and all deferred tax liabilities are due immediately and settle immediately; whereas accounts payable doesn't get "settled" since it's required to sustain day-to-day operations. Anyone or any book that tells you that "cash taxes" is literally taxes paid in cash has not grasped this extremely importantly fundamental concept of valuation and going concerns.
Read More
I am modeling out a company that has been experiencing NI losses (and pre-tax income losses) over the last few years and recently has started turning a profit. In attempting to figure out what taxes will be next quarter and for the full year, what is the best way to do this? I am not looking for perfect precision here (As in based on the differences in D&A for tax reporting versus D&A reported for GAAP etc...) I just wondering is there a good rule of thumb or simpler method. I guess my question applies to two tax numbers 1.) the income tax expense reported in the income statement and 2.) cash taxes as is often supplied as suplemental infomation at the bottom of the Cash Flow Statement.
Thank you Read More