Archie Smith works full-time as a dentist and is in a 50% tax bracket. He lives on an acreage where he began a part-time farming operation last year (20x1). During 20x1, Archie incurred farm expenses totaling $38,500 and he received $5,200 in farming revenue. Operations became more profitable this year, and in 20x2 Archie's farm revenues were $20,000 and expenses totaled $16,000.
Required:
a) Name the type of loss that Archie was able to recognize in 20x1? Briefly explain your answer.
b) Calculate the loss from farming operations that Archie was able to apply against his other sources of income in 20x1.
c) What effect will the 20x1 operations have on Archie's 20x2 and future year's taxable income? Show your calculations.

Question

Quizplus · Accepted Answer

The Answer is a) Archie was able to recognize a restricted farm loss. Farming is not his primary source of income; therefore, the loss amount is restricted. b) Archie's restricted farm loss in 20x1 is $17,500. $5,200 - $38,500 = ($33,300); $2,500 + 50% [33,300 - $2,500] = $17,900. Limited to $17,500. c) The unused loss of $15,800 ($33,300 - $17,500) may be applied to the next twenty subsequent years and is restricted to farming income. $4,000 may be applied in 20x2 (restricted to 20x2's farming income ($20,000 - $16,000)). The remaining $11,800 ($15,800 - $4,000) is available for future carry-over and may be applied against farming income.

Archie Smith Works Full-Time as a Dentist and Is in a 50