Carmen purchased a business for $150,000 by investing $40,000 of her own funds and borrowing $110,000 from Local National Bank. Carmen signed the note payable as a personal guarantor. In the first year of operations the business had an operating loss of $120,000. During the second year, the business has an operating loss of $45,000. How much of the year two loss is deductible against Carmen's income from other business activities? Assume that Carmen materially participates in the business.

Question

Quizplus · Accepted Answer

Carmen can deduct the losses from the business against her income from other business activities, but only up to the amount of her investment in the business. In this case, her investment was $40,000. Therefore, in the first year, she can deduct $40,000 and carry forward the remaining $80,000 to future years. In the second year, she can deduct up to $30,000 ($40,000 - $10,000 already used in year one) of the loss against her income from other business activities. Therefore, the correct answer is (C) $30,000.

Carmen Purchased a Business for $150,000 by Investing $40,000 of Her