Fantino Inc. was incorporated in 2013 and adopted a calendar year for tax purposes. Here is a schedule of Fantino's taxable income for 2013 and 2014. In 2015, Fantino generated $297,300 ordinary income and recognized a $14,000 net capital loss. Which of the following statements is true?

Question

Fantino Inc. was incorporated in 2013 and adopted a calendar year for tax purposes. Here is a schedule of Fantino's taxable income for 2013 and 2014.  In 2015, Fantino generated $297,300 ordinary income and recognized a $14,000 net capital loss. Which of the following statements is true?

Quizplus · Accepted Answer

Since Fantino had a net capital loss of $14,000 in 2015, it can use this loss to offset its taxable income in the previous two years, starting with 2014. Since the net capital loss exceeds the maximum allowable capital loss deduction of $3,000 per year, it can carry back the excess amount of $11,000 to the previous tax year, which is 2014.

Fantino can carry the net capital loss back to 2014 and receive a refund of the taxes paid in that year. The refund amount would be the tax paid on the reduced income resulting from the capital loss. The tax rate for Fantino in 2014 was 39.1%. Therefore, the tax refund amount would be $11,000 x 39.1% = $4,301.

However, the maximum refund amount that Fantino is allowed to claim in 2014 is limited to the taxes paid on the income in that year, which is $5,460. Therefore, Fantino can carry back the full $11,000 capital loss to 2014 but can only claim a refund of $2,262 ($5,460 - $3,198). Therefore, Choice (D) is the correct answer.