Billingsworth Corporation has the following net capital gains and losses for 2015 through 2018. Billingsworth' marginal tax rate is 34% for 2015 to 2017 and is 21% in 2018.
?
$$\begin{array} { c c c c }
2015 & 2016 & 2017 & 2018 \
\$ 8,000 & \$ 3,000 & \$ 6,500 & \$ ( 9,000 )
\end{array}$$
In 2018, Billingsworth Corporation earned net operating income of $30,000. What is/are the tax effect(s) of the $9,000 net capital loss in 2018?
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 2015 through 2018. Billingsworth' marginal tax rate is 34% for 2015 to 2017 and is 21% in 2018.
?
$$\begin{array} { c c c c } 
2015 & 2016 & 2017 & 2018 \
\$ 8,000 & \$ 3,000 & \$ 6,500 & \$ ( 9,000 )
\end{array}$$
In 2018, Billingsworth Corporation earned net operating income of $30,000. What is/are the tax effect(s) of the $9,000 net capital loss in 2018?
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 $9,000 net capital loss in 2018 can be used to offset other capital gains or up to $3,000 of ordinary income. Since there is no other capital gain or loss in this question except for the $9,000 net capital loss, it can offset up to $3,000 of the $30,000 net operating income, resulting in taxable income of $27,000 ($30,000 - $3,000).

Therefore, statement I is incorrect because corporate taxable income is $27,000, not $21,000.

However, statement II is correct because the $9,000 net capital loss will provide a tax refund of $3,060 ($9,000 x 21% tax rate). This is because the tax rate in 2018 is lower than in the previous years, and the net capital loss can be carried back up to three years to offset capital gains and ordinary income in those years, resulting in tax refunds.

Billingsworth Corporation Has the Following Net Capital Gains and Losses 2015201620172018$8,000$3,000$6,500$(9,000)\begin{array} { c c c c } 2015 & 2016 & 2017 & 2018 \\\$ 8,000 & \$ 3,000 & \$ 6,500 & \$ ( 9,000 )\end{array}2015$8,000​2016$3,000​2017$6,500​2018$(9,000)​

Billingsworth Corporation Has the Following Net Capital Gains and Losses $\begin{array} { c c c c } 2015 & 2016 & 2017 & 2018 \\\$ 8,000 & \$ 3,000 & \$ 6,500 & \$ ( 9,000 )\end{array}$