For this tax year,Madison Corporation had taxable income of $80,000 before using any of the net operating loss from the previous year.Madison has never elected to forgo the carryback of its losses since incorporation five years ago.Madison's books and records reflect the following income (loss)since its incorporation. What amount of taxable income (loss)should Madison report on its current tax return?

Question

For this tax year,Madison Corporation had taxable income of $80,000 before using any of the net operating loss from the previous year.Madison has never elected to forgo the carryback of its losses since incorporation five years ago.Madison's books and records reflect the following income (loss)since its incorporation.  What amount of taxable income (loss)should Madison report on its current tax return?

Quizplus · Accepted Answer

Madison has never elected to forgo the carryback of its losses from previous years, therefore, we can assume that Madison’s net operating loss from the previous year has already been applied to reduce the current year’s taxable income. We can see from the chart provided that Madison had a net operating loss of $20,000 in Year 4. Therefore, Madison’s taxable income for the current year is $80,000 - $20,000 = $60,000. However, the chart also shows that Madison had a capital loss of $5,000 in Year 5. Since capital losses can only offset capital gains and up to $3,000 of ordinary income, the $5,000 capital loss cannot be used to offset the $60,000 taxable income. Therefore, Madison’s taxable income for the current year is $60,000 + $5,000 = $65,000. Option B is the correct answer.

For This Tax Year,Madison Corporation Had Taxable Income of $80,000