CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a domestic C corporation, has a current year net capital gain of $10,000 and incurred a net capital loss of $5,000 in the prior year. What is the amount of net capital gain that the C corporation must include in its current year taxable income?
- A$15,000
- B$5,000
- C$10,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: B. $5,000
C corporations can carry back net capital losses 3 years and carry forward 5 years to offset capital gains. The prior year's $5,000 net capital loss can be carried forward to offset the current year's $10,000 net capital gain, resulting in a net capital gain of $5,000 ($10,000 - $5,000) included in taxable income.
Why the other options are wrong
- A. Incorrect. This would imply adding the loss instead of offsetting it.
- C. Incorrect. The prior year capital loss must be utilized against current year gains.
- D. Incorrect. The corporation still has a net capital gain after the carryforward.
C Corp Capital Loss Carryforward
C corporations can carry back net capital losses 3 years and carry forward 5 years to offset capital gains.
- Offset only capital gains, not ordinary income
- Carryback first, then carryforward
- Losses are treated as short-term capital losses in the carryback/carryforward year
Memory trick: Capital loss: 3 back, 5 forward, only against capital gains, word for word.