| Which of the following statements is false regarding corporate capital losses? |
When applying the carryback, and carry forward rules for corporate capital losses, the losses may be carried forward for 5 years, not 7 years.
| Word Corporation reported gross income from operations of $450,000 and operating expenses of $480,000. Word Corporation also received a dividend income of $100,000 from Knit, Inc., a domestic corporation, of which Word is a 10% shareholder. What is the amount of Word Corporation’s net operating loss? |
defines a net operating loss as the excess of deductions over gross income, with certain modifications. One modification is that the dividends-received deduction is limited to 50% of taxable income before the dividends-received deduction unless the full deduction creates or increases an NOL. Since an NOL is not created, the dividends-received deduction is limited to $35,000. Thus, Word has net income rather than an NOL.
Gross income from operations | $450,000 |
Dividend income | 100,000 |
Less: Operating expenses | (480,000) |
Net income before dividends-received deduction | $ 70,000 |
Less: Dividends-received deduction | |
($70,000 × 50%) | (35,000) |
Net income | $ 35,000 |
| For the current tax year ending on December 31, Orange Corporation had gross income of $600,000 and operating expenses of $900,000. Contributions of $5,000 to qualified charities were included in expenses. In addition to the expenses, Orange Corporation had a net operating loss carryover from last year of $8,000. What is Orange Corporation’s net operating loss for the year? |
defines a net operating loss as the excess of deductions over gross income, with certain modifications. One of the modifications is that a deduction for a net operating loss carryover is not allowed in computing a current NOL. Furthermore, a deduction for charitable contributions is not allowed because it is limited to 25% of taxable income (and Orange has a loss). Thus, Orange’s NOL for the year is $295,000 ($600,000 gross income – $895,000 business expenses).
| With regard to the treatment of capital losses by corporations other than S corporations, which of the following statements is false? |
| A capital loss that cannot be offset in the current year may be carried back 3 years and carried forward for up to 5 years. When a capital loss is carried to another tax year, it is treated as a short-term loss regardless of its original characterization. |
| For the tax year ended December 31 of the current year, ABC Corporation had gross income of $300,000 and operating expenses of $450,000. Contributions of $2,500 were included in the expenses. In addition to the expenses, ABC had a net operating loss carryover of $8,000. What is the amount of ABC’s net operating loss for the current year? |
Section 172(c) defines a net operating loss as the excess of deductions over gross income, with certain modifications. One of the modifications is that a deduction for a net operating loss carryover is not allowed in computing a current NOL. Furthermore, a deduction for charitable contributions is not allowed because it is limited to 25% of taxable income (and ABC has a loss). Thus, ABC’s NOL for the year is $147,500 ($300,000 gross income – $447,500 business expenses).
| Iron Corporation incurred net short-term capital gains of $40,000 and net long-term capital losses of $90,000 during 2020. Taxable income from other sources was $500,000. How are the capital gains and losses treated on the 2020 tax return, Form 1120? |
| Under Sec. 1211, a corporation’s capital losses are deductible only to the extent of capital gains, whether they are short- or long-term. A net capital loss is not deductible against ordinary income in the tax year incurred. It cannot increase a net operating loss. A corporation’s net capital loss (NCL) for a particular tax year may be carried back to each of the 3 preceding tax years and forward to the 5 succeeding tax years. No election to forgo the carryback is provided. The NCL must be used to the extent possible in the earliest applicable tax year. The oldest unused NCL is applied first. |
| During the current year, Pack Corporation reported gross income from operations of $350,000 and operating expenses of $400,000. Pack Corporation also received dividend income of $100,000 from Smith, Inc., a domestic corporation, of which Pack is a 20% shareholder. The NOL carryover from the previous year is $5,000. What is the amount of Pack’s net operating loss for the current year? |
defines a net operating loss as the excess of deductions over gross income with certain modifications. One modification is that the dividends-received deduction is computed without regard to the Sec. 246(b) limitation of 65% of taxable income. Also, a deduction for a net operating loss carryover is not allowed in computing a current NOL. Consequently, Pack’s NOL is computed as follows:
Gross income from business operations | $ 350,000 |
Dividends received | 100,000 |
Gross income | $ 450,000 |
Less: Business expenses | (400,000) |
Dividends-received deduction | |
($100,000 × 65%) | (65,000) |
Net operating loss | $ (15,000) |
