Cedar Corporation incurs a net capital loss of $20,000 in 20X3 that cannot be deducted on its income tax return but must be carried forward to 20X4. However, Cedar will deduct the net capital loss in the computation of current earnings and profits for 20X3.

A. True

B. False

Answer:True

Explanation:

The computation of profit for accounting purposes differs from profit for tax purposes. An item may be deducted for accounting purposes but not allowed for tax purposes e. g donations and these are referred to as permanent timing differences.

Some items are referred to as temporary timing differences which means they are consider for either tax or accounting in the current year and they are not consider for tax or accounting in the current year. This is called defer tax and it can be an asset if it leads less tax in future or a liability if it leads more tax payment in future.

The above explains why the net capital loss will be deducted in the current year for accounting profit and in the future for tax profit.