CPA Exam — REG (Regulation)Federal Taxation of EntitiesHard
A client, a domestic C corporation, incurred a net capital loss of $30,000 in 2023. In 2021, the corporation had a net capital gain of $5,000, and in 2022, it had a net capital gain of $10,000. The corporation had no other capital gains or losses in prior years. How much of the 2023 net capital loss can be carried back to 2021?
- A$0
- B$5,000
- C$10,000
- D$15,000
Show answer & explanationAnswer & explanation
Correct answer: B. $5,000
C corporations can carry back net capital losses three years and carry forward five years. The carryback rule requires applying the loss to the earliest year first. In this case, the 2023 net capital loss of $30,000 is first carried back to 2020 (if any), then 2021, then 2022. Since there was no capital gain in 2020 (implied, as 2021 is the earliest mentioned year with gain), the loss is first applied to 2021's capital gain of $5,000. So, $5,000 of the 2023 loss can be carried back to 2021.
Why the other options are wrong
- A. Incorrect. C corporations are allowed to carry back capital losses.
- C. Incorrect. This would be the amount carried back to 2022 after 2021 is exhausted.
- D. Incorrect. This would be the total amount carried back to both 2021 and 2022.
C Corp Capital Loss Carryback/Carryforward
C corporations can carry back net capital losses three years and carry forward five years, applying them against capital gains in a specific order (earliest year first).
- Carryback period: 3 years.
- Carryforward period: 5 years.
- Losses offset capital gains only.
- Applied to earliest year first (carryback/carryforward).
Memory trick: Losses Roll Back Three, Forward Five.