CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a C corporation, incurred a net capital loss of $15,000 in the current year. It had a net capital gain of $5,000 in the prior year and $2,000 in the year before that. What is the amount of the capital loss carryback available to the C corporation for the prior year?
- A$0
- B$7,000
- C$15,000
- D$5,000
Show answer & explanationAnswer & explanation
Correct answer: D. $5,000
C corporations can carry back net capital losses three years and carry forward five years. The loss is carried back to the earliest year first. For the prior year, it can offset the $5,000 net capital gain. The remaining loss would then be carried back to the year before that.
Why the other options are wrong
- A. This is incorrect; C corporations can carry back capital losses.
- B. This combines the gains from two prior years, but the carryback is applied year by year.
- C. This is the total net capital loss, not the amount carried back to the prior year.
C Corp Capital Loss Carryback/Carryforward
C corporations treat capital losses differently than individuals, allowing carrybacks and carryforwards to offset capital gains.
- Carryback: 3 years (to offset capital gains).
- Carryforward: 5 years (to offset capital gains).
- Capital losses cannot offset ordinary income for C corps.
Memory trick: Three Back, Five Forward: Corporate Capital Losses, A Tax Game Plan!