Patrick has a business net operating loss of $70,000 in 2015. Patrick's business generated significant taxable profits in 2013 and in 2014. Which of the following is true?

Question

Patrick has a business net operating loss of $70,000 in 2015. Patrick's business generated significant taxable profits in 2013 and in 2014. Which of the following is true? ​

Quizplus · Accepted Answer

According to the tax law, a net operating loss can be carried back up to two years and carried forward up to 20 years to offset taxable income. Therefore, Patrick may offset income he generated in 2013 and 2014 with 2015's net operating loss by carrying the net operating loss back to each of those tax years. The remaining net operating loss (if any) can be carried forward and used to offset future taxable income. Choice B is incorrect because a net operating loss cannot be used to offset income from any year the taxpayer chooses; it can only be carried back or forward within the specified time frames. Choice C is incorrect because a net operating loss can be used to offset past taxable income as well as future taxable income. Choice D is incorrect because Patrick cannot simply elect to offset the income he generated in 2014 with the net operating loss. He must carry back the net operating loss to 2014 and then carry forward any remaining loss to future years.

Patrick Has a Business Net Operating Loss of $70,000 in 2015