Billingsworth Corporation has the following net capital gains and losses for 2013 through 2016.Billingsworth' marginal tax rate is 34% for all years.
In 2016,Billingsworth Corporation earned net operating income of $30,000.What is/are the tax effect(s)of the $9,000 net capital loss in 2016?
I.Corporate taxable income is $21,000.
II.The net capital loss will provide income tax refunds totaling $3,060.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Billingsworth Corporation has the following net capital gains and losses for 2013 through 2016.Billingsworth' marginal tax rate is 34% for all years.  ​
In 2016,Billingsworth Corporation earned net operating income of $30,000.What is/are the tax effect(s)of the $9,000 net capital loss in 2016?
I.Corporate taxable income is $21,000.
II.The net capital loss will provide income tax refunds totaling $3,060.
​
A)​Only statement I is correct. 
B)​Only statement II is correct. 
C)​Both statements are correct. 
D)​Neither statement is correct.

Quizplus · Accepted Answer

The net capital loss of $9,000 can be used to offset other capital gains or up to $3,000 of ordinary income in the current year. In this case, since the corporation has no other capital gains to offset the loss, it can use the $3,000 to offset its net operating income, resulting in taxable income of $27,000 ($30,000 - $3,000). The tax liability on this amount would be $9,180 ($27,000 x 0.34), which is lower than the tax liability without the loss. The remaining $6,000 of the loss can be carried forward to future years. Therefore, statement II is correct, but statement I is incorrect because the taxable income is $27,000, not $21,000.

Billingsworth Corporation Has the Following Net Capital Gains and Losses