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Cumulative Tax Benefit of Interest $40 $80 $120 $160 $200

Tax Benefit of NOL $40 $60 $80 $20 $ —
Cumulative Tax Benefit of NOL $40 $100 $180 $200 $200

Note that the cumulative tax benefit of interest expense, with an NOL present, is still $200 in Scenario
C.

Scenario D — Projections Excluding Interest Expense and Including NOLs

Year
1 2 3 4 5

Earnings Before Interest & Taxes $200 $250 $300 $350 $400
Interest Expense $ — $ — $ — $ — $ —
Earnings Before Taxes $200 $250 $300 $350 $400
Tax Rate 40% 40% 40% 40% 40%
Beginning NOL $500 $300 $50 $ — $ —

NOL Used $200 $250 $50 $ — $ —
Taxes With NOL Utilization $ — $ — $100 $140 $160
Cumulative Taxes $ — $ — $100 $240 $400

Tax Benefit of Interest $ — $ — $ — $ — $ —
Cumulative Tax Benefit of Interest $ — $ — $ — $ — $ —

Tax Benefit of NOL $80 $100 $20 $ — $ —
Cumulative Tax Benefit of NOL $80 $180 $200 $200 $200

Note that the cumulative tax benefit of the NOL, without interest expense, is still $200 in Scenario D.

Observations:

1. The utilization of an NOL does not affect the tax benefit of interest expense. The tax benefit of in-
terest expense is the same ($200) whether an NOL is being utilized or not. The utilization of an
NOL is based on taxable income, which is after-interest expense. Any tax benefit of interest ex-
pense has already been realized before any NOL is utilized. This can be seen by comparing Sce-
nario C with Scenario D.

2. Interest expense reduces taxable income and will therefore reduce the utilization of an NOL in any
given year. The portion of an NOL that is not utilized due to interest expense is deferred to later

© 2020 Association of International Certified Professional Accountants 123