Studios reported a net capital loss of $30,000 in year 5.It reported net capital gains of $14,000 in year 4 and $27,000 in year 6.What is the amount and nature of the book-tax difference in year 6 related to the net capital carryover?
A)$11,000 unfavorable.
B)$11,000 favorable.
C)$16,000 unfavorable.
D)$16,000 favorable.

Question

Quizplus · Accepted Answer

To calculate the book-tax difference related to the net capital carryover in year 6, we need to first determine the amount of the carryover. This is calculated as the sum of the net capital gains from previous years (year 4 in this case) less any net capital loss carried over from prior years.

Therefore, the amount of the net capital gain carried over from year 4 can be calculated as:
Net capital gain carryover = Year 4 net capital gains – Prior year net capital loss carryover 
Net capital gain carryover = $14,000 – $0 (assuming no net capital loss was carried over from prior years) 
Net capital gain carryover = $14,000

Now we need to determine the book-tax difference related to this carryover in year 6. This is calculated as the difference between the amount of the carryover that is included in taxable income (i.e. the amount of the net capital gain realized in year 6 that is attributable to the carryover) and the amount of the carryover that is deducted for book purposes (i.e. the amount of the carryover that is subtracted from book net income to arrive at taxable income).

The taxable amount of the carryover is calculated as the lesser of the actual net capital gain realized in year 6 or the amount of the carryover. In this case, the net capital gain realized in year 6 was $27,000, which is greater than the carryover amount of $14,000. Therefore, the taxable amount of the carryover is $14,000.

For book purposes, the full amount of the carryover is deducted from book net income. This is because book depreciation/amortization is based on book value, which already takes into account the tax effects of the net capital gain/loss carryover.

Therefore, the book-tax difference related to the net capital carryover in year 6 is:
Book deduction for net capital gain carryover = $14,000 
Taxable amount of net capital gain carryover = $14,000 
Book-tax difference = Book deduction – Taxable amount 
Book-tax difference = $14,000 – $14,000 
Book-tax difference = $0

However, we also know that Studios reported a net capital loss of $30,000 in year 5. This loss may generate a net operating loss (NOL) carryover for tax purposes, which could affect the book-tax difference. Without more information about the NOL carryover (e.g. whether it can be carried back or forward, the tax rate in effect in the carryover year, etc.), we cannot determine the exact amount or nature of any book-tax difference related to the NOL carryover. Therefore, answer choices A and C are incorrect. Answer choice B is incorrect because it implies a favorable book-tax difference, which is not the case based on the calculations above. Answer choice D correctly identifies the unfavorable book-tax difference related to the net capital carryover.

Studios Reported a Net Capital Loss of $30,000 in Year