CPA Exam — REG (Regulation)Federal Taxation of EntitiesHard
A client, a C corporation, has a net capital loss of $40,000 in the current year (2023). It had a net capital gain of $15,000 in 2020 and a net capital gain of $20,000 in 2021. The corporation had no other capital gains or losses in other years. How much of the 2023 net capital loss can be carried back to 2020?
- A$0
- B$20,000
- C$40,000
- D$15,000
Show answer & explanationAnswer & explanation
Correct answer: D. $15,000
A C corporation's net capital loss can be carried back 3 years and carried forward 5 years. The loss is applied to the earliest year first. The 2023 net capital loss of $40,000 is first carried back to 2020. The capital gain in 2020 was $15,000, so $15,000 of the 2023 loss can be used to offset the 2020 gain. The remaining loss of $25,000 ($40,000 - $15,000) would then be carried back to 2021.
Why the other options are wrong
- A. Incorrect. C corporations are allowed to carry back capital losses.
- B. Incorrect. This is the capital gain from 2021, which is the next year the loss would be carried back to.
- C. Incorrect. The entire loss cannot be carried back to 2020 because the capital gain in 2020 is only $15,000.
C Corp Capital Loss Carryback/Carryforward
A C corporation may carry a net capital loss back 3 years and forward 5 years to offset capital gains. The loss must be applied to the earliest year first.
- Carryback: 3 preceding years.
- Carryforward: 5 succeeding years.
- Applied as a short-term capital loss.
- Must be applied to the earliest year first.
Memory trick: C Corp: '3 Back' to '5 Forward' for Capital Loss Recovery.