SEE Business Section Practice Exam

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Stephanie Sinclair
Subject: Net income, net operating losses, and loss limitations including passive activity and at risk limitations
FFA EA Book Reference: CH 13 Corporations
Question:
Ace Corporation had $700,000 of gross income from business operations and $725,000 of allowable business expenses. It also received $50,000 in dividends from a domestic corporation for which it can take an 80% deduction, ordinarily limited to 80% of its taxable income before the dividends received deduction. What is Ace Corporation's Net Operating Loss?
A. $15,000
B. $0
C. $40,000
D. $65,000
Rationale:
A corporation figures a net operating loss in the same way it figures taxable income. It starts with its gross income and subtracts its deductions. If its deductions are more than gross income, the corporation has an NOL.

Correct Answer: A

Why is the answer not B?  The question states the dividend received deduction is limited to 80% of taxable income which would limit it to $20,000 ($700000 Gross + $50000 dividends less $725000 expenses) which would result in ordinary income of $5000 ($700000 Gross + $50000 dividends lsess $725000 expenses less $20000 dividends received deduction).


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Vote for this anser to SEE Business Section Practice Exam
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Rain Hughes DRD is $40,000 (80% of $50,000). Therefore, gross income after the deduction is $710,000. Subtract $725,000 in expenses to arrive at NOL of $15,000.
Comments
Thanks, Rain. I found the answer too when I was reviewing that chapter again. I thought the limitation was involved but realized it isn't if a NOL is involved.
Posted by Stephanie on 02/24/2012 @ 3:10 PM

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